The US economy is showing signs of resilience amid a slowdown in inflation, according to the latest data from the Bureau of Labor Statistics (BLS). The consumer price index (CPI), which measures the changes in the prices of goods and services, rose by 0.5% in December 2023, compared with 0.8% in November and 0.9% in October. This was the lowest monthly increase since July 2023, when the CPI rose by 0.3%.
The slowdown in inflation was driven by lower price increases across major categories, such as energy, food, transportation, and housing. Energy prices, which have been a major contributor to inflation in recent months, rose by 3.5% in December, down from 6.1% in November and 4.8% in October. Gasoline prices, which account for about 5% of the CPI, rose by 6.1% in December, down from 12.3% in November and 6.7% in October.
Food prices, which account for about 15% of the CPI, rose by 0.7% in December, down from 0.8% in November and 0.9% in October. Food prices have been affected by supply chain disruptions, labor shortages, and adverse weather conditions. However, some analysts expect food inflation to moderate in the coming months, as supply and demand conditions improve.
Transportation prices, which account for about 16% of the CPI, rose by 0.4% in December, down from 1.1% in November and 1.4% in October. Transportation prices have been influenced by the fluctuations in energy prices, as well as the availability of vehicles and air travel. The prices of new vehicles rose by 0.4% in December, down from 1.4% in November and 1.1% in October. The prices of used vehicles, which have soared in the past year due to high demand and low supply, fell by 0.4% in December, after rising by 2.5% in November and 2.3% in October. The prices of airline fares rose by 0.9% in December, down from 4.7% in November and 2.6% in October.
Housing prices, which account for about 42% of the CPI, rose by 0.4% in December, down from 0.5% in November and 0.6% in October. Housing prices have been driven by the high demand for shelter, especially in the rental market, as well as the rising costs of materials and labor. The prices of rent of primary residence rose by 0.4% in December, down from 0.5% in November and 0.6% in October. The prices of owners’ equivalent rent of primary residence, which measures the change in the amount homeowners would pay to rent or would earn from renting their homes, rose by 0.4% in December, down from 0.5% in November and 0.6% in October.
Core inflation also moderates
Core inflation, which excludes the volatile food and energy components, also moderated in December, rising by 0.2%, compared with 0.5% in November and 0.6% in October. This was the lowest monthly increase since February 2023, when core inflation rose by 0.1%.
Core inflation was affected by lower price increases in some categories, such as apparel, medical care, and recreation. Apparel prices fell by 0.7% in December, after rising by 1.4% in November and 0.9% in October. Medical care prices rose by 0.1% in December, down from 0.4% in November and 0.5% in October. Recreation prices rose by 0.2% in December, down from 0.4% in November and 0.5% in October.
However, core inflation was also influenced by higher price increases in some categories, such as education, personal care, and tobacco. Education prices rose by 0.4% in December, up from 0.3% in November and 0.2% in October. Personal care prices rose by 0.6% in December, up from 0.4% in November and 0.3% in October. Tobacco prices rose by 1.1% in December, up from 0.8% in November and 0.7% in October.
Annual inflation remains high
Despite the slowdown in monthly inflation, the annual inflation rate remained high, reflecting the cumulative impact of the price increases over the past year. The CPI rose by 7% in December 2023, compared with December 2022, the highest annual increase since June 1982, when the CPI rose by 7.1%. The core CPI rose by 5.5% in December 2023, compared with December 2022, the highest annual increase since February 1991, when the core CPI rose by 5.6%.
The annual inflation rate was higher for the lowest income households than for the highest income households, according to a recent analysis by Jacob Orchard, a doctoral candidate in economics at the University of California San Diego. Orchard calculated that inflation was running at 7.2% for the lowest income households, compared with 6.6% for the highest income households, as of December 2023. The main driver of the growing gap was the increases in groceries and gas prices, which account for a larger share of the budget for poorer families.
Outlook for inflation
The outlook for inflation in the US depends on several factors, such as the course of the COVID-19 pandemic, the supply and demand conditions in the economy, the monetary and fiscal policies, and the inflation expectations of consumers and businesses.
The COVID-19 pandemic has been a major source of uncertainty and disruption for the economy, affecting both the supply and demand sides. The emergence of the Omicron variant in late 2023 has led to a surge in cases and hospitalizations, prompting some governments to reimpose restrictions and some consumers to reduce their mobility and spending. However, the Omicron variant has also been associated with milder symptoms and lower mortality rates, especially among the vaccinated population, which may limit its economic impact. Moreover, the availability and effectiveness of vaccines and treatments have improved over time, raising the prospects of a gradual return to normalcy.
The supply and demand conditions in the economy have also been affected by the pandemic, as well as by other factors, such as weather events, geopolitical tensions, and structural changes. The supply side has faced challenges such as labor shortages, supply chain bottlenecks, transportation delays, and rising input costs, which have constrained the production and delivery of goods and services. The demand side has experienced shifts in consumer preferences and spending patterns, such as increased demand for durable goods, online shopping, and home improvement, and reduced demand for travel, entertainment, and dining out. These imbalances between supply and demand have contributed to the upward pressure on prices.
The monetary and fiscal policies have also played a role in influencing the inflation dynamics. The Federal Reserve, the US central bank, has maintained an accommodative stance, keeping the federal funds rate near zero and continuing its asset purchase program, to support the economic recovery and the labor market. However, the Fed has also signaled its intention to tighten its policy stance in response to the inflationary pressures, by accelerating the tapering of its asset purchases and projecting three interest rate hikes in 2024. The Fed has also revised its inflation forecast upward, expecting the CPI to rise by 5.3% in 2023, compared with 4.2% in its previous projection in September.
The fiscal policy has also been expansionary, as the federal government has enacted several stimulus packages to provide relief and assistance to households, businesses, and state and local governments affected by the pandemic. The most recent package, the Build Back Better Act, which aims to invest in social and environmental programs, is still pending in the Congress, facing opposition from some lawmakers over its size and scope. The fiscal policy has helped to boost the aggregate demand and income in the economy, but it has also added to the public debt and the inflationary pressures.
The inflation expectations of consumers and businesses are another important factor that can influence the actual inflation outcomes. Inflation expectations reflect the beliefs and perceptions of how prices will change in the future, which can affect the decisions and behaviors of economic agents, such as wage setting, price setting, saving, and spending. Inflation expectations can also affect the credibility and effectiveness of the monetary policy, as the Fed relies on its communication and actions to anchor the inflation expectations around its target of 2%. If inflation expectations become unanchored and rise persistently, they can create a self-fulfilling prophecy and lead to higher actual inflation.
