- U.S. inflation dropped from 7.1% to 6.5% in December 2021 after peaking at 9.1% in June.
- Despite the decline, the prices of goods and houses are still peaking.
- The inflation dip might not prevent another interest rate hike from the Fed.
According to the U.S. Labor Department report, inflation was 6.5% over the 12 months to the end of December, a positive decline from the 7.1% mark in the previous month.
U.S. inflation had dropped six months in a row, with the December decrease marking the smallest decline through the year. Inflation peaked at 9.1% in June and has been falling steadily since.
Forbes report shows that energy products like petrol and household groceries witnessed a sharp drop in price during the month compared to November.
Used vehicle prices were off 2.5% for the month and are now down 8.8% year-over-year.
Excluding food and energy, the consumer price index rose 0.3% last month and was up 5.7% from a year earlier, the report said. Overall, prices slipped 0.1% over the month, with lower energy costs fueling the first drop in 2 1/2 years.
President Joe Biden celebrated the report, remarking-
We’re moving in the right direction. It all adds to a real break for consumers, more breathing room for families.”
Goods Inflation is still in the Red
Despite the inflation decline, analysts have warned that the prices of certain items show no sign of dropping.
Clothing prices rose 0.5% from November to December and were up 2.9% compared with a year earlier. Food prices were up 0.3% month-over-month and 10.4% compared to a year ago.
“Goods deflation isn’t broadening out quite as quickly as we expected,” Paul Alsworth, chief North American economist for Capital Economics, wrote.
Rent prices have also soared, with the most significant increase occurring from 2021 to 2022 at 14.07% based on average rent increases.
Some cities were hit with average price hikes of up to 40% in 2022, leaving renters with the choice of either moving to be able to afford rent or paying much more of their salary to stay in their houses.
While the lower numbers add to growing evidence that the worst inflationary period in four decades is winding down, the Fed expects inflation to fall enough to approach its 2% target well into 2024.
Neil Shah, Executive Director at investment research firm Edison Group said: “Fuelled by lower than expected energy prices and a weakening second-hand car market, inflation is retreating at a slow but sustainable pace, repeatedly coming in at or below expectations.
“Investors have been clear that any negative surprises in CPI would set a pessimistic tone for the year ahead, yet the new figures – coupled with slowing wage growth – will reassure those who predict a return to healthy inflation by the end of the year. However, we expect equity market volatility as the market will remain highly reactive to key data to set the mood.”
The Importance of CPI
The Federal Open Market Committee (FOMC) began raising interest rates in March 2022 to bring inflation back to its 2% long-term target.
While the aim has been to bring down inflation without tipping the U.S. economy into a recession, the rigid monetary policy has severely hit several sectors, including the technology sector.
However, the dip might have yet to come quick enough to prevent another interest rate hike by the Federal Reserve when it meets on February 1.
“Inflation in the U.S. continues its downward trajectory coming in at 6.5% in December, a number that is likely to be positive for markets hoping that the Federal Reserve slows its rate hiking schedule,” Richard Carter, head of fixed interest research at Quilter Cheviot, said.
Carter’s prediction points to the likelihood that the Fed will go for a 25 bps rate hike at the next meeting.
He added that the Fed’s rhetoric would need close monitoring as it has continued to take a hawkish stance “while the labor market is tight and the economy can handle it – it will likely claim that the battle against inflation continues rather than declare victory.”
“We are a long way from getting through this current inflation malaise, and with recessionary talk ever present, the next moves of the Fed remain uncertain.”
The market is also bracing for an additional curb on Russian oil supply due to sanctions over its invasion of Ukraine.
