Consumer prices fell 0.1% in December, in line with economists’ expectations

Inflation closed in on a modest retreat in 2022, with consumer prices in December posting their biggest monthly decline since the start of the pandemic, the Labor Department said on Thursday.

The consumer price index, which measures the price of a broad basket of goods and services, fell 0.1% for the month, according to Dow Jones estimates. This equates to the biggest month-on-month decline since April 2020, when much of the country was under lockdown to fight the Covid-19 outbreak.

Even with the decline, the CPI rose 6.5% from a year ago, highlighting the continuing burden of rising living costs on American households. However, this is the smallest annual increase since October 2021.

Excluding volatile food and energy prices, the so-called co-CPI rose 0.3%, and met expectations. Core rose 5.7% from a year ago, back in line.

Steep decline in petrol accounted for the monthly decline. Prices at the pump fell 9.4% for the month and are now down 1.5% from a year ago after crossing $5 a gallon in mid-2022.

Fuel oil fell 16.6% for the month, contributing to a total decline of 4.5% in the energy index.

Food prices rose 0.3% in December, while accommodation prices rose 0.8% for the month and are now up 7.5% from a year ago. Accommodation accounts for one-third of the total CPI index.

Used vehicle prices, also an important initial driver of inflation, fell 2.5% month-on-month and are now down 8.8% year-on-year.

Markets reacted little to the news, with futures tied to the Dow Jones Industrial Average and Treasury yields across most maturities down.

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Both annual increases remain above the Federal Reserve’s 2% target, but continue to move lower.

The CPI is the most closely watched inflation measure because it takes into account movements in everything from a gallon of gas to the price of a dozen eggs and plane tickets.

The Federal Reserve prefers a different measure that adjusts for changes in consumer behavior. However, while the central bank draws on a wide range of information when measuring inflation, the CBI is a piece of the puzzle.

Markets are closely watching the central bank’s moves as officials battle inflation at a 41-year high. Supply chain disruptions, the war in Ukraine and trillions in fiscal and monetary stimulus have contributed to rising prices that have spread across most parts of the economy.

Policymakers are weighing how much more to go with interest rate hikes used to slow the economy and control inflation. The central bank raised its key lending rate to a 15-year high of 4.25 percentage points. Officials have indicated the rate could be higher than 5% before they pull back to see the impact of policy tightening.

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