December inflation report expected to show prices have fallen further but remain high

A high-stakes inflation report due Thursday is expected to show that price gains slowed further in December thanks to lower gas and energy costs, but still remain at historically high levels.

Economists expect the consumer price index, which measures a basket of goods including gasoline, health care, groceries and rent, to show monthly price gains are remained stable in December, down from a 0.1% increase in November. On an annual basis, inflation is projected climbing 6.5% year-on-year, down from 7.1% in November and peaking at 9.1% in June.

Excluding the more volatile food and energy measures, prices are expected to rise 0.3%, or 5.7% annually, suggesting that underlying inflationary pressures remain strong.

“I think inflation peaked a long time ago, early to mid-last year,” Luke Tilley, chief economist at Wilmington Trust, told FOX Business. “The question has always been how fast this will reduce. Obviously monetary policy is working and has reached shelter.”

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US inflation

A vendor arranges clothes for sale at a holiday market at Eastern Market in Detroit, Michigan on Sunday, Dec. 11, 2022. (Emily Elconin/Bloomberg via Getty Images/Getty Images)

While consumers have recently gotten relief from inflation in the form of lower gas prices, the latest CPI report will likely show that food and rent costs remain uncomfortably high. This is a worrying development, as higher housing and food costs most directly and harshly affect household budget.

The report is the last before the Federal Reserveat the next policy-making meeting on February 1 and will have major implications for the US central bank, which is tightening monetary policy at the fastest pace in decades as it attempts to crush runaway inflation. Authorities have already approved seven consecutive rate increases in 2022, bringing the federal funds rate to a range of 4.25% to 4.5%, well within restrictive levels. Officials have since indicated that further hikes are coming this year and that they intend to keep rates high for some time.

Businesses and investors on Wall Street are watching closely whether the Fed sticks to another 50 basis point hike when policymakers meet in February or instead approves a smaller 25 basis point increase. Shares rebounded on Wednesday ahead of the report.

The FedWatch CME tool shows a 77% chance of a quarter-point increase and a 23% chance of a half-point increase.

“A weaker inflation report on Thursday morning doesn’t really change their short-term outlook, or their language, that much,” said Tilley, who anticipates a peak rate of around 5%. “It basically validates where they’re coming from wanting to slow down the pace of hikes.”

Federal Reserve Chairman Jerome Powell

Jerome Powell, Chairman of the Federal Reserve, speaks during a press conference following a meeting of the Federal Open Market Committee (FOMC) in Washington, DC on May 4, 2022. (Al Drago/Bloomberg via Getty Images/Getty Images)

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The Fed also monitors other economic indicators, including job growth and consumer inflation expectations. In another encouraging sign for the central bank, there were some signs of an easing labor market and rapidly slowing wage growth in last week’s December jobs report.

“Overall, this report should serve to reassure the Fed that a continued slowdown in the pace of monetary policy tightening – with a 25 basis point rate hike in early February – is appropriate, even if the expectations of a dovish pivot would still be wrong,” Gregory Daco, EY Parthenon’s chief economist, said Friday after the jobs report.

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