WASHINGTON — Rising U.S. consumer prices moderated again last month, bolstering hopes that inflation's grip on the economy will continue to ease this year and possibly require less drastic action by the Federal Reserve to control it.
Inflation declined to 6.5% in December compared with a year earlier, the government said Thursday. It was the sixth straight year-over-year monthly slowdown, down from 7.1% in November. On a monthly basis, prices slipped 0.1% from November to December, the first such drop since May 2020.
The softer readings add to growing signs that the worst inflation bout in four decades is steadily waning. Gas prices, which have tumbled, are likely to keep lowering overall inflation in the coming months. Supply chain snarls have largely unraveled. That's helping reduce the cost of goods ranging from cars and shoes to furniture and sporting goods.
"This is the starting point for much better inflation rates, which should bolster consumer and business confidence," said Joe Brusuelas, chief economist at tax consultants RSM.
December's lower inflation reading makes it likelier that the Fed will slow its interest rate hikes in the coming months. The Fed may raise its benchmark rate by just a quarter-point at its next meeting, which ends Feb. 1, after a half-point increase in December and four three-quarter-point hikes before that.
Fed officials signaled they intend to boost their key rate above 5% — a move that would likely keep mortgage rates high, along with the costs of auto loans and business borrowing. The Fed's higher rates are intended to slow spending, cool the economy and curb inflation.
But if inflation continues to ease, the Fed could suspend its rate hikes after that, some economists say, or implement just one additional hike in March and then pause.
"If actual inflation is trending downward, the Fed can take more comfort that it's landed the economy in a good place," said Daleep Singh, chief global economist at PGIM Fixed Income and a former Fed staffer. Singh expects the Fed to raise its benchmark rate by a quarter-point at each of its next two meetings and then stop with its key rate just below 5%.
In remarks Thursday morning, President Joe Biden suggested that the "data is clear" that U.S. inflation is dropping. "It's coming down in America month after month, giving families some real breathing room," he said.
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Cars pass a gas station sign displaying the price of regular
unleaded gasoline Dec. 13, 2022, in Benton, Mo.
Charlie Riedel, Associated Press
Inflation also has been dropping, though to a lesser degree, in Europe and in the United Kingdom. Annual inflation in the 19 countries that use the euro currency fell for the second straight month in December but still hit a painful 9.2%. That was down from November's 10.1% but still higher than normal.
While annual inflation in the U.K. eased to 10.7% in November from 11.1% a month earlier, it's still stuck near a 40-year high, with food and energy prices squeezing consumers.
Central banks in Europe and the U.K. are still raising interest rates but have slowed their pace.
Even as inflation gradually slows, it remains a painful reality for many Americans.
Excluding volatile food and energy costs, so-called core prices rose 5.7% in December from a year earlier, slower than the 6% in November. From November to December, core prices increased just 0.3%, after rising 0.2% in November. In the past three months, core inflation has slowed to an annual rate of just 3.1%.
Grocery prices rose 0.2% from November to December, the smallest such increase in nearly two years. Still, those prices are up 11.8% from a year ago.
Behind much of the decline in overall inflation are falling gas prices. The national average price of a gallon of gas has sunk from a $5 in June to $3.27 as of Wednesday, according to AAA.
Also contributing to the slowdown are used car prices, which fell for a sixth straight month in December. New car prices declined, too. The cost of airline tickets also dropped.
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A man walks through a used car lot Sept. 29, 2022, in
Pittsburgh.
Gene J. Puskar, Associated Press
Still, for most Americans, the Fed's rate hikes have made auto loans much more expensive.
Housing costs are still surging, with apartment rental costs jumping 0.8% from November to December and 8.3% compared with a year earlier. The year-over-year increase was the fastest in four decades.
After two straight weekly increases, the average long-term U.S. mortgage rate came back down again this week but remains a significant hurdle for many prospective homebuyers.
Mortgage buyer Freddie Mac reported Thursday that the average on the benchmark 30-year rate fell to 6.33% from 6.48% last week. A year ago the average rate was 3.45%.
The average long-term rate reached a two-decade high of 7.08% in the fall.
U.S. applications for unemployment benefits fell to their lowest level in 15 weeks as the job market continues to show resiliency.
The number of Americans applying for jobless aid for the week ending Jan. 7 fell to 205,000, from 206,000 the week before, the Labor Department said Thursday. Last week's number was revised up by 2,000 to 206,000.
The four-week moving average of claims, which softens some of the week-to-week volatility, fell by 1,750 to 212,500.
Jobless claims are generally viewed as a proxy for layoffs, which have been relatively low since the COVID-19 pandemic wiped out millions of jobs in 2020.
