US consumer prices fall in December, raising hopes next Fed rate hike will stop shy of 5%

US consumer prices fall in December, raising hopes next Fed rate hike will stop shy of 5%
The seal of the Board of Governors of the United States Federal Reserve System is displayed in the ground at the Marriner S Eccles Federal Reserve Board Building in Washington. (File photo: AP Photo/Andrew Harnik)

United States consumer prices unexpectedly fell for the first time in more than 2.5 years in December amid declining prices for gasoline and other goods, suggesting that inflation was now on a sustained downward trend.

The consumer price index dipped 0.1 per cent last month after gaining 0.1 per cent in November, the Labor Department said on Thursday (Jan 12). That was the first decline in the CPI since May 2020, when the economy was reeling from the first wave of COVID-19 infections.

Economists polled by Reuters had forecast the CPI unchanged.

The Federal Reserve is now seen to likely deliver just a quarter-point interest rate hike at its next meeting and likely to ultimately stop raising rates short of 5 per cent, after Thursday’s government report showed inflation eased last month.

Fed funds futures rose after the report and ticked up further after Philadelphia Fed President Patrick Harker said quarter-point interest rate hikes would now be appropriate.

Prices now reflect about a 95 per cent probability that the Fed will raise rates just a quarter of a percentage point at its next meeting from Jan 31 to Feb 1, versus about 5 per cent for a half-point hike.

Last year, most of the Fed’s rate hikes were in 75-basis-point increments as central bankers sought to tighten policy quickly to bring down 40-year-high inflation.

Thursday’s data still showed consumer prices rose 6.5 per cent in the 12 months through December, still far higher than the Fed’s 2 per cent target but the slowest pace in more than a year.

Traders also increased bets on Thursday that the Fed will deliver only one more quarter-point rate hike before stopping at a 4.75 per cent to 5 per cent range, and then will cut rates in the second half of the year.

The current target range is 4.25 per cent to 4.5 per cent.

Source: Reuters/rc