The favored inflation gauge of the Federal Reserve fell further in December as consumer spending also dropped, giving investors hope the Federal Reserve’s aggressive interest rates hike may be in the market’s rearview mirror.
Released Friday, the Commerce Department data showed that prices increased 5% in December compared to a year prior, a half-percentage point drop from November’s 5.5% rise, and the third reduction in a row.
From November to December, consumer spending also fell, by 0.2%, as November was also revised lower to show a decline of 0.1% from October to November. The 2022 holiday season was sluggish for retailers, and the last two months showed the weakest readings in two years.
The Federal Reserve has been increasing interest rates consistently throughout 2022, looking to cool the economy and reduce the demand for products, which has been driving up prices for nearly two years. Next week it is expected the Fed’s meeting will yield another interest rate hike.
The regulator’s key rate, which sets many consumer and business loan rates, is now in the range of 4.25%-4.5%, up from 0% last March. Though the Fed has slowed the pace of the increases of late, most economists still expect to see the US economy tipped into a recession sometime in 2023.
The economy grew at a healthy pace in the last three months of the year according to government data. Overall, the economy grew at a 2% annual rate over the October to December quarter, which was a slight decrease from the previous quarter’s 3.2% rate. However economists noted that most of the growth was driven by one time events such as companies restocking inventories, supply chain pressures easing, and a shrinking US trade deficit.
The new data, showing that consumer spending fell as business investment shrank, during that period indicates the recorded economic growth may have a much less stable foundation.
As consumers reduce their spending, companies will see less profits, which will lead to companies seeking to cut costs. That could produce waves of layoffs.
The Bank of America has forecast three quarters of slowing growth in the beginning of this year, followed by three quarters of a shrinking economy.
However the Fed has indicated it wants to see the jobs market cool, before it will consider easing its monetary policy, and the reduced consumer spending is exactly what the Fed wants, to slow the rate of price increases and bring inflation down to the central bank’s 2% target rate.
The Federal Reserve’s beige book, which gathers anecdotal reports from businesses across America, said last week, “Many retailers noted increased difficulty in passing through cost increases, suggesting greater price sensitivity on the part of consumers.”
