US CPI data for December – What to make out of it?

13 Jan 2023 , 03:08 AM

US CPI inflation came down 0.1% in December from that in November, according  to data from US Bureau of Labor Statistics. On a year-on-year basis, it increased by 6.5%.  Inflation came down on a month-on-month basis in December, mainly because of decline in gasoline prices. 

Food prices increased 0.3% in December, over that in November. If one excludes food & energy prices, then inflation increased month-on-month by 0.3% in December. This increase was 0.2% in November. Even among components of the energy basket, only the price of gasoline came down in December.  Other items that saw their prices decline in December are used trucks & cars, and airline fares. 

If one looks on year-on-year basis, the 6.5% increase in inflation is the slowest increase since October 2021. This fact shows the extent of inflation that the US economy has suffered in the past two years. Much of this high inflation is because of the numerous disruptions caused to supply chains and labor markets because of Covid lockdowns and restrictions.  Unlike India, US is a developed economy. As a developed economy, US has fewer supply chain constraints than a developing economy. The target inflation rate of US Central Bank is therefore a much lower 2%. Target inflation rate of Indian central bank is between 2% and 6%. In the period between 1960 and 2021, average inflation rate of US economy has been just 3.8% annually.

In the 12-month period between the end of December 2021 and December 2022, prices, excluding food & energy prices, increased on average by 5.7%. Energy prices increased by 7.3%. Food prices increased by 10.4%. Price of fuel oil or gasoline increased sharply by 41.5% in this 12-month period. So the month-on-month decline in gasoline in December 2022 may be because of high base effect. Electricity prices increased by 14.3% in this period. Piped gas price increased by 19.3% in the period. 

This data shows that consumer price inflation in United States remains at high levels. A higher consumer price inflation lowers the real income of citizens. The higher interest rate because of the hawkish policy of Federal Reserve regarding inflation has further added to the burden of US citizens. They will have to pay higher interest rates on loans that they have taken, such as their home mortgage loans. The higher interest outgo further reduces their real disposable income. This can have an adverse impact on consumption in the US economy in the months to come. The hawkish stand of US Federal Reserve does not seem to have a meaningful impact on bringing down inflation rate anywhere close to its target level of 2%. If the US Federal Reserve does not give up its hawkish stand on raising interest rates soon, it may push US economy into a severe recession. And the global economy will be pulled apart too.