Let's all breathe a sigh of relief: Inflation is easing.
Today's Consumer Price Index (CPI) report showed the U.S. economy actually experienced deflation last month, as prices dropped 0.1% after a 0.1% gain in November. The annual rate of inflation also cooled to 6.5%, down from 7.1% in November and in line with economist estimates.
A sharp decrease in gas prices was the biggest reason for last month's decline, offsetting higher costs for food and housing. The "core" rate of inflation, which excludes food and energy costs, rose 0.3% last month and 5.7% year-over-year, easing from November's 6% annual rate. Those figures were also in line with economist projections.
The news should inject optimism for investors and shoppers who have been concerned about the impact of rising costs on the U.S. economy and the decisions the Federal Reserve could make as a result. For anyone who has been struggling as higher prices have made shopping for groceries and other goods a financial pain, today's data shows that the Fed's rate hikes have been doing their job.
Investors also have a reason to cheer as the cooling inflationary environment could spell less aggressive interest rate hikes from the Fed at a more moderate pace. The central bank is set to kick off its first policy meeting of the year at the end of the month, and with inflation slowing, investors are predicting that the Fed will only dole out a rate hike of 25 basis points.
But since the Fed is not likely to stop raising rates altogether, stocks were flat on the news. It's important to remember that inflation still remains far above the Fed's stated target of 2%. Policymakers have made it clear that they won't let up until inflation falls in line with that figure. Until then, we can all rejoice that our wallets won't be getting dinged so much any more.
- Kristin
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