From housing to energy to food, U.S. inflation picks up, though some costs rise only mildly

WASHINGTON — Higher energy and housing prices boosted overall U.S. inflation in December, a sign that the Federal Reserve's drive to slow inflation to its 2% target will likely remain a bumpy one.

Thursday’s report from the Labor Department showed that overall prices rose 0.3% from November and 3.4% from 12 months earlier. Those gains exceeded the previous 0.1% monthly rise and the 3.1% annual inflation in November and were slightly above economists' forecasts.

More than half the month-to-month increase reflected higher housing costs. Energy costs, along with food prices, also contributed to inflation.

Excluding volatile food and energy costs, though, so-called core prices rose just 0.3% month over month, unchanged from November's increase. Core prices were up 3.9% from a year earlier — the mildest such pace since May 2021.  By excluding costs that typically jump around from month to month, they're seen by economists as a better guide to the likely path of inflation.

Inflation has cooled more or less steadily since hitting 9.1% 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 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% higher than they were before the inflation surge began and are still rising.

Thursday's figures reflected the outsize role that housing plays in the U.S. consumer price index — roughly a third of the index. Overall housing prices rose 0.5% from November to December. Rents were up 0.4%, homeownership 0.5%.

Over the past year, consumers have enjoyed price declines for some individual items. Furniture and bedding prices are down 4%, for example. Men’s suits and coats are 6% lower, televisions 10%, sporting goods nearly 3%, sausages nearly 4%.

In the metropolitan area, consumer prices rose 2.9% last month compared with December 2022, according to William J. Sibley, regional commissioner for the federal Bureau of Labor Statistics. It was the smallest year-over-year increase since June, records show.

Prices in the 25-county region that includes Long Island climbed 0.1% last month compared with November.

The cost of groceries rose 0.8% last month compared with December 2022, with prices rising the most for nonalcoholic beverages, cereal and baked goods.

Residential rents climbed 5% in December compared with a year earlier. The cost of recreation and electricity were up 7.1% and 4.5%, respectively. 

The increases were partially offset by lower prices for gasoline, down 3.1%, year over year, and natural gas, down 12.1%.

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% 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% 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.

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% to around 3% was easier to achieve than reaching the Fed’s 2% 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 signaled 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% 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.

With James T. Madore