Inflation continued to cool in December 2022, an indication that the Federal Reserve's aggressive interest rate hike push is working as intended.
The consumer price index, the market's preferred inflation measure, rose 6.5% year over year on a non-seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported. It was the sixth consecutive month of lower annual growth since index readings peaked in June 2022 at 9.1%.
"The Fed will gladly take this inflation report," said Edward Moya, a senior market analyst with OANDA. "The impacts of their earlier rate hikes are starting to be reflected in these data points."
Overall, the index declined 0.3% month over month on a non-seasonally adjusted basis. Energy prices fell 6.1% sequentially in December 2022, including a 12.5% drop in gasoline prices.
"The main reason for lower inflation is the decline in gasoline prices," said Michael Hewson, chief market analyst with CMC Markets. "That means inflation is just as likely to move higher than come down in the coming months."
New vehicle prices were up 5.9% on the year but just 0.1% from November 2022 on an unadjusted basis. Used car and truck prices have fallen 8.8% since December 2021 and were lower by 2.4% from a month earlier. Vehicle prices have skyrocketed in the last two years amid a supply crunch.
Food prices rose 0.3% month over month and 10.4% annually. Prices fell in several food categories including meats, poultry and fish, which fell 0.8% from November 2022. Dairy prices were flat, while the price of eggs jumped 11.1% before seasonal adjustment. On a year-over-year basis, the price of eggs soared 59.9%.
Inflation continued to vary by region, with the consumer price index climbing 7% in the South and 6.1% in the Northeast.
No smiles in services
Services prices, which account for nearly 58% of the index's overall weight, remained sticky as they rose 7% from December 2021, before seasonal adjustment, and climbed 0.5% month over month.
Shelter, a major component of services, rose 7.5% year over year and 0.7% from a month earlier.
Transportation services, which include car leases and vehicle maintenance, were up 14.6% year over year but down 0.2% on a sequential basis. Airline fares, another component of transportation services, increased 28.5% on the year but fell 8.2% from the previous month.
Services inflation is closely tied to wage growth, which has begun to slow in several industries, despite a persistently tight jobs market.
"Inflation in core services is still high, but the overall trend is improving," said Kathy Jones, managing director and chief fixed-income strategist with the Schwab Center for Financial Research. "I think the Fed will see this as the policy working."
The Fed has raised benchmark interest rates by 425 basis points since March 2022 and is expected to raise rates by another 50 to 75 basis points over its next two meetings.
While still well above the Fed's goal to return inflation to roughly 2%, the apparent slowdown in price increases will likely compel central bankers to stop hiking rates sometime this spring and then push pause, keeping the benchmark federal funds rate close to 5% until sometime in 2024, according to Dryden Pence, chief investment officer at Pence Capital Management.
That pause will offer companies a chance to plan their capital budgets and give the economy some breathing room, which may keep a potential recession mild, Pence said.
"The Fed wants to wait, they don't want to oscillate," Pence said. "Oscillation can be disastrous for the economy."