Here’s the inflation breakdown for December 2022 — in one chart

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The inflation rate declined in December as consumers saw prices plummet at the gasoline pump, providing another hopeful sign for households that price pressures are continuing to ease from their highest level in decades.

Inflation closed out 2022 with a 6.5% annual reading, as measured by the consumer price index, the U.S. Bureau of Labor Statistics said Thursday. It was in line with economists' expectations.

The CPI reading for December marked the smallest 12-month increase since October 2021. It fell from 7.1% in November.

The index measures how quickly average prices are rising or falling for a basket of goods and services, like consumer electronics, food, utilities and tickets to sporting events.

A decline in the annual inflation rate doesn't mean consumers saw deflation, which is when overall prices decrease. The annual rate in December was still positive — meaning prices rose but at a slower pace than earlier in the year.

Monthly price movements are a better gauge of short-term inflation trends than the annual rate. Significantly, the monthly inflation reading was negative — declining by 0.1% — meaning average prices did fall for American consumers in December relative to November. The last time that happened was May 2020, when consumer demand collapsed in the early months of the Covid pandemic.  

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"Inflation is on its back heels," said Mark Zandi, chief economist at Moody's Analytics. "It's moderating steadily and, at this point, quickly.

"I don't think people will be talking about inflation this time next year," Zandi added. "It just won't be at the top of their agenda when thinking about their own finances."

Categories with the largest changes in December

Other categories with declines over the month of December included used cars and trucks (a 2.5% decrease), airline fares (3.1%), and new vehicles and personal care, which each fell by 0.1%, according to the CPI report.

Notably, the shelter index increased over the month, with prices swelling by 0.8%, up from 0.6%. But signals indicate housing costs have peaked and should start moderating "meaningfully" in CPI data by the summer and into the second half of the year, Zandi said.

Why inflation has been so high

The dynamics that had underpinned high inflation for physical goods seem to be retreating. Supply-chain issues have largely faded, while a strong U.S. dollar relative to foreign currencies generally makes it less costly to import goods from overseas.

But inflation for "services" — which might include anything from haircuts to hotel stays — has proven a bit stickier. Labor costs are a big driver. Demand for workers is near historic highs and the unemployment rate low, helping fuel competition for workers and therefore fast-rising wages — in turn feeding through to high labor costs for businesses and putting upward pressure on their service costs.

Economists generally prefer using a so-called "core" inflation measure to gauge inflationary trends in the U.S. economy. This measure of CPI assesses prices without food and energy (like gasoline and fuel oil), which can experience big swings up and down from month to month.

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The monthly inflation excluding food and energy was 0.3% in December, up slightly from 0.2% in November. Shelter was the "dominant" factor in that increase, according to the CPI report.

Housing costs are a major component of core inflation, and account for the largest portion of average household budgets. The government's measure of housing inflation is slow-moving, Hunter said. Private-sector data show rental growth is slowing "very sharply," a trend that should show up in the CPI over the coming months, Hunter said.

Aside from housing, "it just feels like, across the board, inflation is cooling off here very quickly," Zandi said. "I think it's already starting to feel better for people."


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