Inflation Marks a 6-Month Decline

Prices for gasoline, vehicles and some food items fell, but services costs rose, and the labor market remains tight.

January 13, 2023

ALEXANDRIA, Va.—U.S. inflation declined in December for the sixth consecutive month after peaking in June, reports the Wall Street Journal. The consumer-price index was up 6.5% in December year over year, down from 7.1% in November and much lower than its 2022 peak of 9.1% in June.

Core CPI, which does not include energy and food prices, increased 5.7% year over year, down slightly from November’s 6% increase. Looking at the three months ended in December, core CPI increased at a 3.1% annualized rate, which was the slowest pace in over a year and down sharply from June’s 7.9% increase.

“The December CPI report was welcome good news after a very bad patch for inflation,” Bill Adams, chief economist at Comerica Bank, told the Journal. He said consumers are getting relief from lower gasoline prices and moderating food prices, as well as declining prices for other goods.

Mark Zandi, chief economist at Moody’s Analytics, told CNBC that “inflation is on its back heels.”

Zandi added, “I don’t think people will be talking about inflation this time next year. It just won’t be at the top of their agenda when thinking about their own finances.”

Overall, inflation is turning a corner, reports the Journal, and it seems as if the surge in inflation was transitory, as Federal Reserve officials initially thought. Many took “transitory” as meaning “brief,” but it more so meant that prices were rising because of a supply-and-demand imbalance that would sort itself out as the economy normalized.

Although normalization took much longer than expected, it’s underway in several key product markets, according to the Journal. However, the U.S. is not out of the woods yet, as even the most favorable interpretation of the economy leaves current, underlying inflation above the Fed’s 2% target.

Exports and imports were down in November from October, and retail sales, manufacturing output and home sales all declined. The Department of Labor reported last week that the economy added 223,000 nonfarm jobs during December, down slightly from the month prior, and the unemployment rate fell to 3.5%.

However, the job market is still tight, with about 1.7 job openings for every available worker, leading to wage hikes, as companies are paying their workers to stay. Wage increases and resulting price increases can feed inflation, making the cost of living go up, and many workers are seeking cost-of-living increases, helping contribute to wage growth among job stayers, economists say.

Federal Chairman Jerome Powell recently said that price trends for services, not including housing, reflect inflationary pressures in the broader economy and were important when gauging inflation’s future path.

“Because wages make up the largest cost in delivering these services, the labor market holds the key to understanding inflation in this category,” he said in a recent speech.

Wages for workers who stayed in their roles were up 5.5% in November year over year, according to the Federal Reserve Bank of Atlanta, up from 3.7% in January 2022 and the highest increase in 25 years. Job seekers in retail and leisure and hospitality can easily find positions that offer more pay, making it enticing to switch, Layla O’Kane, senior economist at Lightcast, told the Journal.

Those who switched jobs saw an average wage gain of 7.7% in November year over year, and the prospect that employees might leave for bigger paychecks is a main reason companies are raising wages for existing employees, according to the Journal.

Services, excluding utilities, were up 7% in December, while shelter prices were up 7.5%. Both increases were the biggest since 1982. Also, the cost of daycare and preschool increased 5.4% last month year over year, which was the biggest increase since 2006.

The central bank raised interest rates seven times in 2022, totaling 4.25 percentage points, and the Fed has made it known that it will continue to raise rates in 2023. The Journal reports that cooling inflation could lead the Fed to decrease the size of its interest-point increase to a quarter-percentage-point at its meeting later this month.

To combat inflation in New York state, Governor Kathy Hochul has proposed a plan that would automatically increase the state’s minimum wage to keep up with inflation. Under the proposal, each year, the state’s minimum wage would increase at a rate determined by the year-over-year consumer price index for wage earners for the Northeast Region. To ensure that no single-year increase would threaten employment, annual increases would be capped, and the proposal would also allow for an “off-ramp” in the event of certain economic or budget conditions. Seventeen other states also tie minimum wage to inflation or some other economic gage.

Economic conditions like inflation have had a huge impact on the convenience retail industry in the past two years. At this year’s NACS State of the Industry Summit, John Benson of AlixPartners LLP will share key insights during the “U.S. Economic Outlook for 2023 and Beyond” session. Registration is open at