While U.S. inflation continues to ease, more rate hikes may follow

Government policymakers may have finally gotten their arms around escalating inflation as the consumer price index rate cooled significantly in December. Yet some central bankers still favor boosting interest rates further, despite rising recession fears.

Inflation is still growing but at the slowest pace since October of 2021, as gas prices and airfares fell, the government said. The CPI rose 6.5% in the year through December, down from 7.1% in November.

The so-called core inflation measure, which extracts food and fuel prices in order to get at underlying trends, came in at a 5.7% rebate in December, compared with 6% in the previous month.

Fed 'likely to continue' tightening

“The rate of year-over-year inflation moderated roughly in-line with expectations but remains historically high,” said Phillip Neuhart, director of market policy and economic research at First Citizens Bank Wealth Management. “Considering this report, the Federal Reserve will likely continue to tighten monetary policy, potentially at a slower pace.”

Indeed, some Fed board members are already on the record agreeing to further tightening. Federal Reserve Bank of Boston President Susan M. Collins said she would consent to another quarter-point raise when the Fed Board meets on Feb. 1. The Fed called for a 50 basis point increase in rates in December following four consecutive 75 basis point increases through the year.

“I think 25 or 50 points would be reasonable; I’d lean at this stage to 25” Collins told reporters, a day before the new CPI numbers were announced. “But it’s very data dependent.”

Collins, who doesn’t have a vote in next month’s Fed meeting but will contribute to the deliberations, said adjusting slowly gives policymakers more time to evaluate their impact on inflation and economic factors in general.

In a speech Thursday, Federal Reserve Bank of Philadelphia President Patrick Harker echoed calls for a quarter point raise and more.

“I expect that we will raise rates a few more times this year, though, to my mind, the days of us raising them 75 basis points at a time have surely passed,” he said. “In my view, hikes of 25 basis points will be appropriate going forward.

Inflation expected to cool

Inflation overall is expected to cool further, most policymakers and economists say, as supply chains reopen and resolve backlogs. Rental costs, which helped push CPI rates in December are expected to continue as a factor for some time, many believe. Rents for new apartments have climbed ore slowly, data suggest.

But service prices for thinks like concert and sporting tickets, hotels and restaurants and even health care services, which are rising faster than forecast, may till block the Fed from reaching its 2% CPI rate goal. Fed policymakers think that in order to bring services inflation under control they will need to dampen the job market and slow wage gains to prevent companies from burgeoning labor costs which get passed on to consumers.

"Even though the CPI rose 6.5% from a year ago, the decline of consumer prices by 0.1% in December suggests that we are past peak inflation,” said Santiago Guzman, founder and CEO of Cap8, a Boston-based capital management and investment firm. “The forces that held inflation at historically low levels before the pandemic were structural ones that will not disappear and most probably strengthen.”

The upwards pressure we have seen in prices after the pandemic, he said, was the result of supply-side shock in the system due to shutdowns and the current geopolitical situation in Europe.

“This was not balanced away by lower levels of consumption,” said Guzman. “The imbalance can be partially attributed to pent-up demand during the first year after restrictions were lifted, an aggressive fiscal stimulus, and an easy monetary policy. All these dynamics that build upward pressure to inflation are either temporary or no longer there, while the downward forces are long-term.”

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].