Inflation is definitely slowing down — except for egg prices


Inflation is definitely slowing down — except for egg prices

There are two inflation stories. It is still high but notably slowing down since the summer, with six months of annual inflation falling, even as monthly price changes can bump up and down.

Inflation in the U.S. economy slowed again, with overall prices falling slightly in December but still up 6.5 percent over the last year, in line with what economists expected. Another measure, “core” inflation, which strips out food and energy prices, rose 0.3 percent in December and is up 5.7 percent over the last year. While far higher than the Federal Reserve’s 2 percent inflation target, price increases have fallen substantially from 9 percent in June, the highest annual inflation figure since the early 1980s.

One area where prices sharply increased was in some basic food staples. Egg prices rose 11 percent in December and 60 percent over the past year, thanks largely to an avian flu outbreak. Prices for meat, poultry and fish were basically flat in December and are up 4.5 percent in the past year.

This month’s report will be closely watched by the financial markets because of hints it might offer about the Fed’s future interest rate hikes.


“I expect that we will raise rates a few more times this year, though, to my mind, the days of us raising them 75 basis points at a time have surely passed. In my view, hikes of 25 basis points will be appropriate going forward,” Federal Reserve Bank of Philadelphia President Patrick Harker said Thursday morning.

In 2022, the Federal Reserve hiked interest rates seven times in 2022, including four times by 0.75 percentage points, in an effort to slow down price increases.

Many analysts expect housing inflation to slow or even reverse later this year, as the private market measures that tend to predict the movement of the Fed’s housing cost index have already gone into reverse.

More recent readings have been softer, with three straight decreases in annual core inflation, the metric watched most closely by the Federal Reserve.

No big surprises in inflation trends

Thursday’s inflation report exemplifies several recent trends in consumer prices.


The first is the influence of gas prices. Gasoline prices fell over 9 percent in December and are even down slightly over the year. According to the Bureau of Labor Statistics, this fall in prices “was by far the largest contributor to the monthly all items decrease, more than offsetting increases in shelter indexes,” i.e., the continued rise in housing prices the Fed tracks, up 0.8 percent in December and 7.5 percent in the last year.

Another major continued trend dragging down inflation in December was the continued fall in used car prices. Thanks to the shortage in chips used to manufacture new cars, used car prices rose steeply in 2021, dragging up overall consumer prices with it. That trend is now sharply in reverse, with seven straight months of falling prices, while the prices of new cars are essentially flat in the past two months.

But for those concerned about prices continuing to rise faster than the Fed’s 2 percent target, there was something in the December numbers that may vindicate their continued pessimism. In recent months, Federal Reserve officials, including the Fed Chair Jerome Powell, have tried to focus attention not on the volatile price of gasoline or even of goods in general, but instead on the services sector and especially the wages paid to workers.

Inflation has moved from goods to services

Annual wage growth is running at 4.6 percent, according to the latest figures. Powell has said in speeches in press conferences that high wage growth makes it essentially impossible for inflation to return to around 2 percent.

The thinking goes that for many service sector businesses, wages are a major component of their overall expenses, so as wages continue to rise quickly, price increases will continue. “Because wages make up the largest cost in delivering these services, the labor market holds the key to understanding inflation in this category. In the labor market, demand for workers far exceeds the supply of available workers, and nominal wages have been growing at a pace well above what would be consistent with 2 percent inflation over time,” Powell said in a speech late last year.

There’s some sign of continuing price increases in those services. The “food away from home” index, which essentially measures restaurant meals, grew faster than the overall food index, 0.4 percent versus 0.2 percent. This is actually a slowdown from faster price increases in the past six months, but it’s still growing faster than the overall increase in prices.

Thanks to Lillian Barkley for copy editing this article.

  • Matthew Zeitlin
    Matthew Zeitlin

    Domestic Economics Reporter

    Matthew Zeitlin is an economics reporter at Grid focused on the domestic impact of major stories such as coronavirus, the supply chain and economic volatility.