Inflation continued its downward trend in December.
Used cars for sale are displayed on the sales lot at K&L Auto Expert, May 6, 2022, in Richmond, Calif.(JUSTIN SULLIVAN/GETTY IMAGES)
Wholesale prices fell sharply in December, further evidence that inflation is moving away from the elevated levels seen last summer, the Bureau of Labor Statistics said on Wednesday.
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Housing, Inflation Top Week’s Econ Data ]Overall prices were down 0.5%, far more than the 0.1% forecast. The drop was driven by a 7.9% decline in the price of energy, although food prices also fell by 1.2%.
On an annual basis, producer prices fell 6.2% in 2022, down from the 10% rate registered at the end of 2021. Excluding food and energy, the annual rate in December was 4.6% compared to 7% a year ago, while the monthly change was an increase of 0.1%, down from November’s 0.3%,
The release follows last week’s consumer price index for December, showing overall inflation falling to 6.5% annually from 7.1% in November. While the two numbers are well beyond the 2% annual target set by the Federal Reserve, they confirm a slowing trend of prices headed into 2023.
The Fed is widely expected to continue raising interest rates when it meets early next month but by a smaller percentage than it has in recent months. Analysts are predicting a 25 basis point hike.
Retail sales, meanwhile, slipped 1.1%, slightly worse than expected. But they are up 6% from December 2021 levels. Retail sales are not adjusted for inflation, so the number reflects both the effects of inflation and weak demand.
Some analysts believe consumers may well take a breather following a holiday season that was marked by aggressive discounting and earlier than usual promotion of seasonal items. That, coupled with an increase in credit card usage, could portend weakening demand.
“I think we’re going to see a pullback,” says Andrew Hogenson, global head of consumer goods, retail & logistics at Infosys Consulting. But, he adds, “I don’t think the spending gene gets turned off. It gets re-directed.”
Jonathan Silver, CEO and founder of Affinity Solutions, which tracks credit and debit card spending patterns, says that while consumers have increased their purchases of services it has not come at the expense of sales of goods.
“Both of those are growing,” Silver says. “The pie is growing.”
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Consumer Sentiment Up on Inflation News ]Silver says that lower income households have also maintained their spending, as the reduction in the price of gasoline and continued wage gains have buoyed their pocketbooks.
“They certainly feel the difference” of lower gas prices, he adds.
Silver says he remains “pretty bullish” on consumer spending, noting that there is little correlation between gloomy consumer sentiment surveys and actual spending patterns.
“There’s a tendency to want to grab the doom and gloom” headlines, he says.
The drop in inflation brought an uptick in demand for mortgages last week, as the rate on a 30-year fixed loan fell to 6.23%, down nearly a point from October’s high level. Mortgage demand soared 28% for the week, according to the Mortgage Bankers Association.
Improving fundamentals led to an increase in Morning Consult’s global consumer confidence survey released Tuesday.
“Falling energy prices and monetary policy tightening have combined to bring down price growth,” the data firm said. “However, the strong policy action taken by central banks across the globe will also dampen demand moving into 2023, with much of the global economy headed for a slowdown.”
Much of the improvement can be tied to global supply chains coming back to their pre-pandemic state, as well as the overall drop in energy-related prices, according to Oliver Chapman, CEO of OCI, a supply chain logistics company.
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Inflation Falls in December ]Chapman notes the drop in prices for commodities such as lumber, as well as the decrease in global shipping costs as key drivers of the reduction in inflation.
“The very indicators pointing to inflation this time last year are now, if anything, pointing to deflation,” Chapman says. “The price of lumber has fallen by roughly two-thirds over the last year, and now the price isn’t far off the five-year average before the Ukrainian crisis. Remember, very early in the post-Covid recovery; people pointed to surging lumber costs as a sign of inflation ahead – those rises have now almost entirely reversed.
“Brent crude has fallen by roughly a third since last summer, DRAM (chip memory) continues to plummet – and is now hovering around a five-year low,” he adds. “As for shipping costs, the Baltic Dry Index is around a third of the level from a year ago, and if the trend seen in recent months continues, it will soon be down to the exceptionally low levels seen during the Covid crisis. In the US, used car prices fell sharply in the second half of last year, and although they remain quite high compared to two years ago, the trend is extremely encouraging.”
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