Core prices were up 3.9 per cent from a year earlier — the mildest such pace since May 2021.
Economists pay particular attention to core prices because, by excluding costs that typically jump around from month to month, they’re seen as a better guide to the likely path of inflation.
Inflation has cooled more or less steadily since hitting 9.1 per cent in mid-2022. Still, despite the slowdown in price increases, along with steady economic growth, low unemployment and healthy hiring, polls show many Americans are dissatisfied with the economy.
That disconnect, a likely issue in the 2024 elections, has puzzled economists and political analysts.
A major factor is the lingering financial and psychological effects of the worst bout of inflation in four decades. Much of the public remains exasperated by higher prices.
Prices are still 17 per cent higher than they were before the inflation surge began and are still rising.
Public perceptions
Pollsters and economists say there’s never been as wide a gap between the underlying health of the economy and public perception. Wage gains have outpaced inflation in recent months, meaning that Americans’ average after-inflation take-home pay is up.
Yet a poll conducted in November by The Associated Press-NORC Center for Public Affairs Research, about three-quarters of respondents described the economy as poor. Two-thirds said their expenses had risen.
“Our grocery bill has doubled,” said Megan Cherry, a psychologist who lives with her husband and children in Temple Terrace, Florida. “We’ve got to change how much we get of each thing. Our kids noticed recently that, ‘Wow, we eat a lot of chicken.’ Well, because we can afford chicken.”
Thursday’s figures reflected the outsize role that housing plays in the US consumer price index — roughly a third of the index.
A measure of home ownership alone makes up about 25 per cent of CPI. The government measures home ownership costs by calculating how much rent a homeowner would likely charge if that home were being rented, a figure seen as equivalent to the cost of owning the property.
Overall housing prices rose 0.5 per cent from November to December. Rents were up 0.4 per cent, home ownership 0.5 per cent.
Over the past year, consumers have enjoyed price declines for some individual items. Furniture and bedding prices are down 4 per cent, for example. Men’s suits and coats are 6 per cent lower, televisions 10 per cent, sporting goods nearly 3 per cent, sausages nearly 4 per cent.
The Fed, which began aggressively raising interest rates in March 2022 to try to slow the pace of price increases, wants to reduce year-over-year inflation to its 2 per cent target level. And there are solid reasons for optimism that inflationary pressure will continue to recede in the coming months.
The Federal Reserve Bank of New York reported this week, for example, that consumers now expect inflation to come in at just 3 per cent over the next year, the lowest one-year forecast since January 2021.
That’s important because consumer expectations are themselves considered a telltale sign of future inflation: When Americans fear that prices will keep accelerating, they will typically rush to buy things sooner rather than later. That surge of spending tends to fuel more inflation.
Supply chain logjams ease
But that nasty cycle does not appear to be happening. And when Fed officials discussed the inflation outlook at their most recent meeting last month, they noted some hopeful signs: In particular, they noted an end to the supply chain backlogs that had caused parts shortages and inflation pressures.
Many economists have suggested that slowing inflation from 9 per cent to around 3 per cent was easier to achieve than reaching the Fed’s 2 per cent target could prove to be.
“It just tells you the last mile is a struggle,’’ said Vincent Reinhart, chief economist at Dreyfus Mellon.
The Fed’s policymakers have signalled that they expect to cut interest rates three times this year. Financial markets rallied in anticipation of lower borrowing costs, and exuberant traders began predicting a rate cut as early as the Fed’s next meeting in March.
But Reinhart, a former top Fed economist, suggested that December’s slightly higher-than-expected inflation and the need for the central bank’s policymakers to agree on any changes in monetary policy will likely delay the first rate cut, probably until September.
Small-business owners, in the meantime, are still adjusting to higher costs.
Among them is Roberto Torres, president of Blind Tiger Coffee Roasters in Tampa, Florida. Torres used to charge $3.50 for a 12-ounce latte; it now costs $5. To save money, he’s buying supplies in bulk — a year’s worth at a time.
And Scott Christian, owner of The Hochatown Saloon, which operates a live-music venue and restaurant in Broken Bow, Oklahoma, has had to raise menu prices by 20 per cent three or four times in the past two years.
Though food inflation has cooled recently, Christian still faces pressure to raise pay to attract workers.
The problem worsened recently when a casino opened in the area and has been competing for the same hourly workers.
“That’s the only thing we can do — go up on price,” he said.
Paul Wiseman is an AP Economics Writer. AP Retail Writer Anne D’Innocenzio in New York and Laura Bargfeld in Tampa, Florida, contributed to this report.
