Fed’s key inflation gauge eased further in December

The Fed has steadily raised lending rates, seeking to slow spending, growth and soaring prices that have plagued the country for nearly two years.

WASHINGTON — The Federal Reserve’s preferred inflation gauge continued to fall in December and consumer spending fell — the latest evidence that the Federal Reserve’s series of interest rate hikes is slowing back the economy.

Friday’s report from the Commerce Department showed prices rose 5% last month from a year earlier, down from a 5.5% year-on-year increase in November. It was the fifth decline. three in a row.

Consumer spending fell 0.2 percent from November to December and adjusted lower to show a 0.1% drop from October to November. Last year’s holiday sales Many retailers were sluggish and overall spending figures for the last two months of 2022 were the lowest in two years.

The Fed has steadily raised lending rates throughout the economy, seeking to slow spending, growth, and soaring prices that have plagued the country for nearly two years. Last year, the Fed raised its benchmark interest rate seven times and next week it will do so again.

The central bank’s prime rate, which affects many consumer and business loans, is now between 4.25% and 4.5%, up from near zero in March last year. Although inflation is decelerating, most economists say they think the Fed’s harsh antidote will tip the economy into recession at some point this year.

The Fed is in an increasingly sensitive position. Chairman Jerome Powell has emphasized that the central bank plans to continue raising the benchmark interest rate and keep it high, potentially through the end of the year. However, that policy could become unsustainable if a severe recession occurs.

Friday’s data could raise concerns that the main driver of the economy, US consumers’ willingness to continue to spend comfortably, is starting to crack under the weight of prices and interest rates. higher capacity.

On Thursday, the government reported that the economy grew at a steady rate in the last three months of last year but with much of the expansion driven by one-off factors: Additional companies Inventory replenishment has been depleted as supply chains struggle and the deficit nation’s trade declines.

In contrast, consumer spending in the October-December quarter overall weakened from the previous quarter and business investment fell sharply. Overall, the economy expanded at an annualized rate of 2.9% in the October-December quarter, down slightly from the 3.2% pace in the previous quarter.

If consumers remain less willing to increase spending, companies’ profit margins will decline and more companies can cut costs. That trend could eventually lead to a wave 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 decline for the next three quarters.

More frugal consumers threaten to push the economy into recession. But they can also help reduce inflation. Companies can’t keep raising prices if Americans don’t pay higher costs.

Last week, the Federal Reserve’s beige book, a collection of anecdotal reports from businesses around the country, said: “Many retailers are noting increased difficulty in getting through increasing costs, suggesting that consumers are more price sensitive.”

A series of large companies, mainly in the technology sector, have announced mass layoffs in recent months, stoking fears that a recession could be approaching. But those job cuts haven’t been enough to boost unemployment, which remains at a half-century low.

In fact, the number of people seeking unemployment benefits – a proxy for layoffs – fell last week to 186,000, a very low level in history. And Walmart, the nation’s largest employer, said it would raise the minimum wage, from $12 to $14 an hour, to help retain and attract workers.

https://www.king5.com/article/news/nation-world/us-inflation-consumer-spending-cooled-in-december-2022/507-cbb621d8-837b-4481-9711-aa3949e17576 Fed’s key inflation gauge eased further in December

Edmund DeMarche

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