The Federal Reserve’s preferred inflation gauge fell further in December and consumer spending fell, the latest evidence that the Federal Reserve’s string of interest rate hikes is slowing the economy.
Friday’s report from the Commerce Department showed prices rose 5% last month from a year earlier, up from a 5.5% year-over-year rise in November. It was the third fall in a row.
Consumer spending fell 0.2% from November to December and was revised down to show a 0.1% drop 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 pullback in consumer spending is likely to be welcomed by Fed officials, who are seeking to cool the economy by making borrowing more and more expensive. A slower pace of spending could boost your confidence that inflation is steadily declining. Still, the year-over-year decline in inflation is in line with the Fed’s outlook and is not likely to shake expectations that it will raise its benchmark rate by a quarter point next week.
On a monthly basis, inflation rose just 0.1% from November to December for the second month in a row. Energy prices fell 5.1% and the general 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 year-on-year figure was down from 4.7% in November, though still well above the Fed’s 2% target.
Falling prices for oil, gas, copper, lumber, wheat, and other raw materials, along with the unlocking of supply chains, have helped drive down retail costs for cars, furniture, and clothing, among others. articles.
However, price increases have remained stubbornly high for some goods and services, including eggs, which jumped 60% last month compared to a year earlier. Egg prices rose 11.1% in December alone, inflated by an outbreak of bird flu that has led to culling of herds and higher feed costs.
Car rental prices have also soared nearly 27% from a year earlier, rising 1.6% in December alone.
But for many other items, inflation is declining. Coffee prices, while rising nearly 14% last year, rose just 0.2% last month. And the cost of clothing and shoes increased only 3% last year and 0.3% last month.
Friday’s figures are separate from the more widely known inflation data that comes from the Consumer Price Index. The CPI, which was released earlier this month, has also shown a steady slowdown.
“The latest data offers the first tangible signs that the main engine of the economy is slowing down,” said Oren Klachkin, lead US economist at Oxford Economics, referring to consumers, whose spending accounts for about 70%. of economic activity.
The Fed has been trying to rein in the spending, growth and rising prices that have plagued the nation for nearly two years. Its key rate, which affects many commercial and consumer loans, is now in a range of 4.25% to 4.5%, up from almost zero last March. Although inflation has been slowing, most economists say they believe the Fed’s tough medicine will push the economy into recession sometime this year.
“We continue to see the US economy experience a mild recession this year,” said Lydia Boussour, a senior economist at EY Parthenon.
A recession typically causes widespread layoffs and higher unemployment. But for now, US employers are hiring workers, and the unemployment rate remains at a half-century low of 3.5%.
If job losses, which are occurring at many financial and technology companies, increase unemployment, a group of economists at the National Bureau of Economic Research, a nonprofit that officially determines when recessions occur, could declare a recession. . NBER economists typically make that announcement long after the recession has started.
For now, the number of people seeking unemployment benefits, a proxy for layoffs, dropped last week to 186,000, a very low level on record. And Walmart, the nation’s largest employer, said it would raise its minimum wage from $12 to $14 an hour to help retain and attract workers.
The Fed is in an increasingly delicate position. Chairman Jerome Powell has stressed that the central bank plans to continue raising its key rate and keep it high, possibly until the end of the year. However, that policy may become unsustainable if a severe recession occurs.
On Thursday, the government reported that the economy grew at a healthy pace in the final three months of last year, but much of the expansion was driven by one-off factors: Businesses replenished depleted inventories as supply chains unraveled. and the nation’s trade. the deficit was reduced.
By contrast, consumer spending in the October-December quarter as a whole weakened from the previous quarter and business investment fell sharply. Overall, the economy expanded at an annual rate of 2.9% in the October-December quarter, slightly less than the 3.2% in the previous quarter.
If consumers remain less willing to increase their spending, companies’ profit margins will shrink and many may cut spending. That trend could eventually lead to waves of layoffs. Bank of America economists have forecast that the economy will grow slightly in the first three months of this year, but then contract over the next three quarters.
The most frugal consumers would threaten to send the economy into a recession. But they can also help reduce inflation. Businesses can’t keep raising prices if Americans don’t pay the higher costs.
Last week, the Federal Reserve’s Beige Book, a compilation of anecdotal reports from companies across the country, said: “Many retailers noted increased difficulty passing on cost increases, suggesting greater price sensitivity due to part of the consumers.