Great News on Inflation! Will It Last?
Consumer goods prices continue to fall, but more importantly, there was encouraging progress on stubborn services prices as well as underlying wage growth.
U.S. inflation has slowed dramatically over the past few months. More importantly, many prices that likely reflect underlying inflationary pressures better than the broader Consumer Price Index (CPI) also rose relatively little in December. That would be consistent with the recent encouraging data on nominal wages.
The question is whether inflation will remain tame, or instead re-accelerate as assorted one-off factors unwind.
Overall, the CPI was 0.08% lower in December than in November on a seasonally-adjusted basis. Since June, prices have increased just 1.9% at a yearly rate. Since September, prices have increased just 1.8% at a yearly rate. The average price level in October-December was 0.8% higher than the average in July-September, which means that the yearly growth rate from Q3 to Q4 was 3.1%.
Falling energy prices—down 15% as of December compared to the peak in June—helped a great deal. (And falling jet fuel prices have helped drag down air fares, which are counted separately.) The unclogging of the motor vehicle production pipeline alongside the drop in purchases of new and used cars and trucks has helped push down prices of everything from car rentals to parts. Maintenance and car insurance prices are still rising faster than before the pandemic, but the monthly price gains are shrinking. Meanwhile, reopening-related inflation in everything from hotels to live events to clothing seems to have petered out.
All of these forces have combined to exert a powerful disinflationary impulse. But they are also temporary.
The novel and important feature of the most recent data is that the prices of everything else (except for housing, which has a known lag) have largely reverted to their pre-pandemic behavior.
Looking further under the hood, there are several reasons for optimism.