US inflation report: 3 charts show how consumer prices fell in December

Inflation has slowed for six straight months, which is good news for consumers and economic policymakers.

In December, consumer prices rose 6.5 percent from a year earlier, down from 7.1 percent in November, according to the Consumer Price Index report released on Thursday. The index fell 0.1 percent from the previous month after prices were taken by 0.1 percent in November.

The downside is mostly due to lower energy costs as gasoline becomes cheaper. Prices of used cars and airlines also fell, while increases in food prices slowed. However, housing costs continue to rise.

As it shows inflation is slowing, the report is positive news for Federal Reserve officials, who have been raising interest rates for months to rein in skyrocketing inflation. By raising rates, the central bank makes borrowing costs more expensive in an effort to curb consumer demand. That should translate into slower price increases as consumers spend less, business investment cools, and companies hire fewer workers.

The Fed is on track to raise rates again at its next meeting at the end of the month, although economic forecasters expect the size of the increase to be smaller than last year’s rate hike.

Below are three charts that help explain current inflation.

Energy prices fell 4.5 percent in December, especially gas prices, which fell 9.4 percent month-on-month. That decline was greater than in November, when energy prices fell 1.6 percent and gas prices fell 2 percent.

Gas prices have started to rise after oil demand rebounded from the pandemic and Russia’s invasion of Ukraine’s energy supplies. Fuel prices are starting to fall as oil prices fall from their peak last summer and the global economy slows, dragging down demand for oil.

The national average gas price was $3.27 on Thursday, according to data from the American Automobile Association. About the same as last month, when the national average price was $3.26, but slightly lower than a year ago when the average price was $3.30.

In good news for grocery shoppers, food price increases are starting to slow after several months of strong gains early last year. In December, food prices rose 0.3 percent from the previous month, down from 0.5 percent in November. Overall, food prices increased by 10.4 percent from the previous year.

Consumers paid more for meat, poultry, fish, and eggs, with the index for those items rising 1 percent from November to December. Overall prices of fruit and vegetables, however, declined by 0.6 percent over the month. The index for milk and related products also fell 0.3 percent.

Food prices rise during a pandemic for a number of reasons. Higher gas prices and labor shortages cost businesses, which are passed on to consumers. The war in Ukraine is also disrupting global food supplies, as it disrupts exports of wheat, sunflower oil, and other products. A deadly bird flu outbreak has also killed millions of birds and destroyed the supply of poultry and eggs from commercial farms.

Fed policymakers pay attention to “core” inflation, which excludes changes in food and energy prices because they can fluctuate from month to month and may not reflect price trends. In December, core prices rose 0.3 percent from the previous month, up slightly from 0.2 percent in November but still slower than the rapid gains seen earlier in the year. Core prices rose 5.7 percent from a year earlier, down from 6 percent in November.

The main component of core inflation was shelter prices, which rose 0.8 percent in December, from 0.6 percent the previous month. But there is reason for optimism: Private sector data shows that rental prices are starting to cool. Many private data sources only check prices for new rentals to take into account the timelier market conditions, while government data also take into account existing rentals. Since rents usually change when the lease expires, which tends to happen every year, changes in rental prices can be seen with government data. This has led economists to expect shelter prices to ease in the coming months.

“Rates for new leases are going to come down,” Fed chairman Jerome Powell said at a press conference in December. “So, if we can overcome the backlog, inflation will come down next year.”

Fed officials are also paying attention to other categories in core inflation. Fed policymakers have said they want to see inflation ease for core services excluding housing, as they may reflect how wage growth drives inflation.

Economists also want to see price growth for core goods continue to slow. Earlier in the pandemic, consumers shifted spending away from services and instead bought other things like exercise bikes and work equipment from home. Rising demand, coupled with supply chain disruptions, has led to an increase in commodity prices. Americans are now spending more on services again, which is helping to increase the price of goods.