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The Federal Reserve’s preferred gauge of inflation eased further in December, and consumer spending fell — the latest evidence that a series of Fed interest rate hikes is slowing the economy.
Friday’s report from the Department of Commerce showed that prices rose 5 percent last month from the previous year, down from a 5.5 percent year-over-year increase in November. It’s the third straight drop.
Consumer spending fell 0.2 percent from November to December and was revised lower to show a 0.1 percent decline from October to November. Last year’s holiday sales were slow for many retailers, and overall spending figures for the last two months of 2022 were the weakest in two years.
The pullback in consumer spending will be welcomed by Fed officials, who are trying to shore up the economy by making debt more expensive. Still, the year-over-year decline in inflation is in line with the Fed’s outlook and will not alter expectations that the central bank will raise key rates by a quarter point next week.
On a monthly basis, inflation was only 0.1 percent from November to December for the second straight month. Energy prices fell by 5.1 percent, and the overall cost of goods also fell.
“Core” prices, which exclude volatile food and energy costs, rose 0.3 percent from November to December and 4.4 percent from a year earlier. The year-over-year figure was down from 4.7 percent in November, though still above the Fed’s 2 percent target.
Not ‘official’ inflation numbers
Friday’s figures are separate from the more familiar inflation data that comes from the consumer price index. The CPI, which was released earlier this month, also showed a steady deceleration.
The Fed has sought to slow spending, growth and rising prices that have plagued the country for nearly two years. The prime rate, which affects most consumer and business loans, is now in the 4.25 percent to 4.5 percent range, down from near zero last March. Even if inflation eases, most economists say the Fed’s tough medicine will push the economy into recession this year.
The International Monetary Fund has warned that up to a third of the global economy is in immediate danger of recession by 2023, as the three largest economies, the US, the EU and China, all slow down.
The Fed is in an increasingly difficult position. Chairman Jerome Powell has confirmed that the central bank plans to raise key rates and keep them on hold, potentially until the end of the year. But these policies may not work in the event of a clear recession.
Friday’s data could add to concerns that the main driver of the economy, the willingness of American consumers to spend freely, is starting to hurt prices and higher interest rates.
On Thursday, the government reported that the economy grew at a healthy clip in the last three months of last year, but with much of the expansion driven by a single factor: Companies replenishing inventories that have run out when supply chains are not resolved, and state trade. the deficit shrinks.
By contrast, consumer spending in the October-December quarter as a whole weakened from the previous quarter, and business investment dropped off sharply. Overall, the economy expanded at an annual rate of 2.9 percent in the October-December quarter, down slightly from the 3.2 percent pace in the previous quarter.
If consumers remain less willing to boost spending, companies’ profit margins will shrink, and many will be able to cut costs. The trend could lead to a wave of layoffs. Economists at Bank of America have forecast that the economy will grow slightly in the first three months of this year – but then shrink in the following three quarters.
More frugal consumers will threaten economic recession. But it can also help reduce inflation. Companies can’t keep raising prices if Americans don’t pay higher costs.
Last week, the Federal Reserve’s beige book, a collection of anecdotal reports from businesses around the country, said: “Many retailers have noted increased difficulty in passing cost increases, which indicates a greater price sensitivity of consumers.”
A raft of large companies, mostly in the technology sector, have announced layoffs in recent months, fueling concerns that a recession is imminent. But those job cuts haven’t been enough to raise the unemployment rate, which is still at a half-century low.
In fact, the number of people seeking unemployment benefits — a proxy for layoffs — declined last week to 186,000, a historically low level. 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.
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