Inflation Slows in December, Still Up 5% Year-Over-Year

WASHINGTON (AP) — The Federal Reserve’s preferred inflation gauge eased further in December, and consumer spending fell — the latest evidence that the Fed’s series of interest rate hikes are slowing the economy.

Friday’s report from the Commerce Department showed that prices rose 5% last month from a year earlier, down from the 5.5% year-over-year increase in November. It was the third consecutive decline.

Consumer spending decreased 0.2% between November and December, but was revised lower to reflect a 0.1% drop from October to November. Last year’s holiday sales were sluggish for many retailersThe overall spending figures for 2022’s final two months were the lowest in over two years.

The Fed has been increasing borrowing rates in the economy steadily for almost two years. This is to slow down spending, growth, and the surging costs that have plagued the nation for the past two years. Last year, the Fed raised its benchmark rate seven times, and next week it’s set to do so again.

The central bank’s key rate, which affects many consumer and business loans, is now in a range of 4.25% to 4.5%, up from near zero last March. Though inflation has been decelerating, most economists say they think the Fed’s harsh medicine will tip the economy into a recession sometime this year.

The Fed is now in a delicate situation. Chair Jerome Powell has stressed that the central banks plans to implement these policies. keep boosting its key rate and to keep it elevatedIt could continue until the end. However, this policy could become unsustainable if there is a severe recession.

Friday’s data may heighten concerns that the economy’s primary driver, the American consumer’s willingness to keep spending freely, is starting to crack under the weight of higher prices and interest rates.

The government reported Thursday that the economy was doing well. grew at a healthy clip in the final three months of last year but with much of the expansion driven by one-time factors: Companies restocked their depleted inventories as supply chain snarls unraveled, and the nation’s trade deficit shrank.

However, overall consumer spending declined in October-December quarter compared to the previous quarter and business investment fell sharply. Overall, the economy grew by 2.9% in October-December quarter, slightly less than the 3.2% pace recorded in the previous quarter.

If consumers remain less willing to boost their spending, companies’ profit margins will shrink, and many may cut expenses. This could lead to waves 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.

An increase in frugal consumers could cause the economy to go into recession. However, they can reduce inflation. Companies can’t keep raising prices if Americans won’t pay the higher costs.

Last week, the Federal Reserve’s beige book, a gathering of anecdotal reports from businesses around the country, said: “Many retailers noted increased difficulty in passing through cost increases, suggesting greater price sensitivity on the part of consumers.”

A number of technology-based companies have recently announced large layoffs. This raises concerns that the recession is near. But those job cuts haven’t yet been enough to raise the unemployment rate, which remains 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 very low level historically. And Walmart, the nation’s largest employer, said it would raise its minimum wage, from $12 to $14 an hourTo help it retain and attract workers.