Washington, Jan. 27 (BNA): The Fed’s preferred measure of inflation eased further in December, and consumer spending fell.
The latest evidence that the Fed’s series of rate hikes is slowing the economy.
Friday’s report from the Commerce Department showed that prices rose 5% last month compared to a year earlier, down from 5.5% year-over-year in November. The Associated Press reported that this is the third consecutive decline.
Consumer spending fell by 0.2% from November to December and was revised downward to show a decline of 0.1% from October to November.
Holiday sales last year were sluggish for many retailers, and overall spending numbers for the last two months of 2022 were the weakest in two years.
The decline in consumer spending is likely to be welcomed by Federal Reserve officials, who are seeking to cool the economy by increasing the cost of lending. A slower pace of spending may boost their confidence that inflation is steadily declining.
However, the decline in inflation on an annual basis is in line with the Fed’s expectations and is not likely to change expectations that it will raise the key interest rate by a quarter point next week.
On a monthly basis, the inflation rate increased by just 0.1% from November to December for the second month in a row. Energy prices fell 5.1%, and the total cost of goods also fell.
“Core” prices, which exclude volatile food and energy costs, rose 0.3% from November to December and 4.4% from a year earlier. The annual number is down from 4.7% in November, although it is still well above the Fed’s target of 2%.
Lower prices for oil, gas, copper, timber, wheat, and other commodities, along with unclogged supply chains, have helped slow retail costs for cars, furniture, and clothing, among other things.
Despite this, price increases have remained consistently high for some goods and services, including eggs, which were up 60% last month compared to last year. Egg prices rose 11.1% in December alone, due to an outbreak of avian influenza that led to flock cullings and higher feed costs.
Car rental rates are also up nearly 27% from a year ago and were up 1.6% in December alone.
But for many other items, inflation is declining. And although coffee prices rose 14% in the past year, they only rose 0.2% last month. The cost of clothing and shoes rose just 3% last year and 0.3% last month.
Friday’s figures are separate from the known inflation data that comes from the Consumer Price Index. The Consumer Price Index, released earlier this month, also showed a steady slowdown.
“The latest data provides the first concrete signs that a major driver of the economy is slowing,” said Oren Klashkin, chief US economist at Oxford Economics, referring to consumers, whose spending accounts for about 70% of economic activity.
The Fed is seeking to slow the spending, growth and price hikes that have bedeviled the nation for nearly two years. The key interest rate, which affects many consumer and business loans, is now between 4.25% to 4.5%, up from near zero last March. Although inflation has been slowing, most economists say they believe the Fed’s aggressive treatment will tip the economy into recession sometime this year.
“We continue to see the US economy suffer a mild recession this year,” said Lydia Bousseur, chief economist at EY Parthenon.
A recession usually leads to widespread layoffs and high unemployment. But for now, American employers are adding workers, and the unemployment rate remains at its lowest level in half a century at 3.5%.
If the job losses occurring at many finance and technology companies increase unemployment, a recession could eventually be declared by a group of economists at the National Bureau of Economic Research, a nonprofit organization that officially determines when a recession will occur. NBER economists usually make such an announcement long after a recession begins.
Right now, the number of people seeking unemployment benefits, which is a proxy for layoffs, fell last week to 186,000, which is a very low level historically. Wal-Mart, the nation’s largest employer, said it would raise the minimum wage, from $12 to $14 an hour, to help it retain and attract workers.
The Federal Reserve is in an increasingly delicate position. Chairman Jerome Powell confirmed that the central bank plans to continue to boost the key interest rate and keep it high, possibly until the end of the year. However, this policy may become untenable in the event of a severe recession.
On Thursday, the government reported that the economy grew at healthy rates in the final three months of last year but with much of the expansion driven by one-time factors: businesses restocked their depleted inventories as the supply chain collapsed, and the nation’s trade collapsed. deficit diminished.
By contrast, consumer spending weakened in the October-December quarter as a whole compared to the previous quarter, and business investment fell sharply. Overall, the economy grew at an annualized rate of 2.9% in the first quarter from October to December, down slightly from the 3.2% pace in the previous quarter.
If consumers remain less willing to spend more, companies’ profit margins will shrink, and many expenses may be reduced. This trend may eventually lead to waves of layoffs. Bank of America economists expected the economy to grow slightly in the first three months of this year, but then contract in the following three quarters.
More frugal consumers threaten to tip the economy into recession. But they can also help reduce inflation. Companies cannot continue to raise prices if Americans do not pay the higher costs.
Last week, the Fed’s Beige Book, a collection of anecdotal reports from companies across the country, said: “Many retailers have noted increasing difficulty in passing cost increases, indicating increased price sensitivity on the part of consumers.”
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