Consumer price data provided Federal Reserve policymakers, the White House and American households with fresh evidence that inflation continued to slow at the end of 2023 by a key measure.
Overall inflation climbed more quickly in December than November on a yearly basis: 3.4 percent versus 3.1 percent previously, which was more than economists in a Bloomberg survey had forecast.
But after stripping out volatile food and fuel prices to get a sense of the underlying inflation trend, a “core” price measure climbed 3.9 percent in the year through December, down from 4 percent previously. That marked the first time the core index has dropped below 4 percent since May of 2021.
The data underscore that while inflation remains faster than usual — and month-to-month bumps are still likely as gas prices fluctuate — the measure continues to make progress back toward a normal pace. That is likely to come as welcome news to central bankers and President Biden after nearly three years of rapid price increases that have pushed up costs for consumers and strained many household budgets.
“We’ve seen how the data can be bumpy,” said Gregory Daco, chief economist at EY-Parthenon. “The important dynamic is really at the core level, and what we’re seeing at the core level on a three or even six-month basis is really encouraging.”
Some of the underlying details could keep Fed officials wary as they wait for 2024 inflation data. Housing inflation remains quicker than many economists had expected, as a slowdown in new rents trickles through the broader housing market only gradually. And while some other goods and service prices are cooling notably, products like vehicle insurance continue to increase in price fairly steeply.
Still, many economists expect inflation to continue to cool in the months ahead as shelter price increases moderate, a recent tick-up in used car prices eases and the economy overall settles back into a more normal pattern.
Fed officials have raised rates considerably to slow economic growth and try to wrestle inflation under control: Their main policy rate now stands at 5.25 to 5.5 percent, up from near-zero as recently as early 2022. But with inflation cooling, central bankers could this year begin to lower interest rates to more normal levels.
Their task is to balance two goals. On one hand, they want to make sure that inflation is coming fully under control. On the other, they do not want to keep borrowing costs too high for too long, risking a recession that would cost jobs and push up unemployment.
Policymakers have signaled that they could cut interest rates three times in 2024. They are not yet willing to fully rule out the possibility of another rate increase before they reverse course, but investors and many economists think that their next move will be to reduce rates — perhaps as soon as March.
For consumers, the decline in inflation means that prices for many everyday purchases — from goods like furniture to services like rent — are no longer climbing as sharply. Some products are actually coming down in price, though for the most part, price levels remain higher than they were a few years ago.
Still, wages are climbing at a solid pace, which should help consumers to catch up. Average hourly earnings have been climbing faster than the overall Consumer Price Index since last summer, on a yearly basis.
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