US prices dropped in December for first time since May 2020 as inflation rate fell to 6.5%

Prices dropped in the US in December for the first time since May 2020, in an encouraging sign that the inflation crisis may be easing.

According to the latest consumer price index (CPI) – which measures a broad range of goods and services – the cost of living dropped 0.1% in December compared to a rise of 0.1% in November. The annual rate of inflation fell to 6.5% from 7.1% in the previous month, the sixth straight month of yearly declines, according to the bureau of labor statistics.

Falling gas prices were by far the largest contributor to the monthly decrease, falling 9.4% over the month, more than offsetting increases in shelter indexes, which rose 0.8% over the month and were 7.5% higher than a year ago.

US inflation peaked at 9.1% in June, its highest rate since 1982, as the war in Ukraine drove up energy costs and supply-chain issues in the wake of the coronavirus pandemic continued to push prices higher.

Despite the fall, the inflation rate remains more than three times as high as the Federal Reserve’s annual target rate of 2%, and is expected to remain elevated through 2023.

The Fed has been increasing interest rates at a pace unseen in decades as it struggles to contain the cost-of-living crisis, announcing its seventh hike of the year in December. Fed chair Jerome Powell has indicated that rate rises may slow as inflation declines, but he has made clear that rates will remain high until inflation is brought down to the central bank’s target rate.

The continued strength of the US jobs market – which recorded its second strongest year of growth on record in 2022 – has also led the Fed to argue higher wages could add to inflationary pressures.

“While there are growing signs that inflation has peaked, the Fed is worried about the overheating labor market,” economists at Bank of America wrote this week. The latest CPI report is “unlikely to quell those concerns”, they concluded.

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