December’s inflation rate came in at 6.5 percent, down from 7.1 percent in November and the slowest annual increase since October 2021. The core CPI, excluding energy and food prices, rose 5.7 percent versus 6 percent in November. The increase is still well above the Fed’s target of 2 percent, but it is moving in the right direction. Much of the drop was attributable to lower gasoline prices, which are not sustainable going forward.
This data is coincidental with a strong labor market; December unemployment was reported at 3.5 percent, the lowest in 50 years, holding out the Fed’s hopes for a “soft landing”, despite pessimistic outlooks by many economists. The Fed is weighing how much higher they need to move rates to tame inflation but minimize the negative effect on the economy. The Fed has raised its benchmark rate to 4.25 percent, the highest in 15 years. Officials have suggested that rates are likely to top 5 percent before they can take a step back. The Fed is expected to increase rates by an additional 0.25 percent at their meeting on February 1.