Inflation probably slowed in December, a sixth month of easing prices

“The Fed is likely preparing to pause [rate hikes] sometime before the middle of the year, and that’s about as good as you’re going be able to get,” Joe Brusuelas, chief economist at RSM, said of the inflation report. “But just remember: Go into a grocery store today, and look at the price of eggs. And remind yourself: Don’t get overexcited about inflation.”

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The December report, known as the consumer price index, follows encouraging news from October and November, when prices fell more than expected, helping to alleviate worries of a one-off drop.

But even if a trend is in the making, there’s a long way to go. Rent costs weigh heavily on overall inflation and aren’t expected to come down meaningfully until later this year, despite a major slowdown in the housing market. To spot areas of the economy where inflation may pose a longer-term problem, Fed officials have directed their attention to a narrow measure of inflation that focuses on services outside of the food, energy and housing markets, where price growth can be especially sticky and put more pressure on wages. These services include health care, education and hospitality.

“It is the core services inflation, excluding shelter services, that just has shown no sense that it’s coming down,” San Francisco Fed President Mary Daly said this week at an event with the Wall Street Journal. “And that historically [has] been persistent and very highly related to the progression of the labor market and wage growth.”

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Fed officials have long said their decisions will be guided by incoming data, and the December report won’t overhaul their outlook in any direction. But it will help fill in their expectations for where inflation is headed before their next meeting, set for Jan. 31-Feb. 1. They’re expected to raise interest rates by either half a percentage point or one-quarter of a percentage point as they get closer to pausing hikes altogether.

For nearly all of 2022, the Fed scrambled to catch up to sky-high prices and hoisted rates by more than four percentage points over the course of the year, the fastest pace in decades. Central bankers aren’t quite finished yet, and they’ve signaled two or three more increases in the coming months. But they will soon shift into a new chapter, pausing rates and keeping pressure on the economy simply by holding borrowing costs high rather than pushing them up more.

The obvious risk is that the Fed might slow the economy so much that it forces a recession. If history is any guide, that could happen this year as the full scope of high rates take hold. But so far, many parts of the economy remain surprisingly resilient: Employers are still eager to hire, and the job market added a strong 223,000 jobs in December. Consumer spending stayed strong through the holiday season. And though layoffs have hit certain parts of the economy, like the housing and tech industries, they are far from widespread.

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Still, uncertainty about the economy’s future can be enough to spook people into pulling back. At First Class Tattoo in New York City, owner Mikhail Andersson said he’s had more cancellations over the past few months than ever before. People will call in the middle of multiday sessions and say they have to wait and save up money before coming back.

Meanwhile, the cost of every single thing Andersson needs to run his shop has gone up, from gloves to paper towels to medical supplies. Yet he hasn’t raised prices because “if we raise the price, we lose the clients.” Andersson has seen a pickup in business since the new year began, possibly from customers who got gift cards or cash over the holidays. He hopes it sticks.

“Our business itself — it’s not like groceries. So when the economy gets hit, it’s not necessary,” Andersson said. “If people don’t have extra money, they’re not going to get a tattoo. They’re going to feed their family.”