The Bureau of Labor Statistics (BLS) released the Consumer Price Index update for December on Thursday, January 12. The index increased 6.4% from December 2021 to December 2022. This year-over-year inflation measure continues to decline from its peak reading of 9% in June 2022.
From November to December, the index decreased by 0.1%, which translates to an annualized rate of about -1%. This month-to-month change follows the small positive annualized rate realized from October to November of +1%.
As mentioned in our previous post on peak inflation, while the year-over-year increase remains well above the Federal Reserve's target rate of 2%, the low annualized month-to-month increase is well below this target. While monthly inflation rates are volatile, the recent string of lower monthly inflation rates suggests that inflation peaked last summer and is now much lower than in the first half of 2022. In fact, from June to December the CPI increased just under 1%, which translates to an annualized rate of just under 2%. By this measure, the Fed has been at or near its target rate for the last six months.
Figure 1 illustrates how prices, wages, and inflation-adjusted wages have changed from January 2021 to December 2022. This has been a period of declining real wages, and currently the purchasing power of wages is 3.5% lower than in January 2021. However, just as with inflation, the path of real wages changed in June 2022. Since June, real wages have increased by 1.3%. Annualized, this is a pace of 2.5% per year. Workers are finally seeing an increase in their purchasing power. So, the news is mixed - we've seen a long-term overall decline in purchasing power of wages, but recently a sustained upward trend.
Figure 2 presents the year-over-year inflation rate along with the annualized month-to-month inflation rate and the Federal Reserve's 2% inflation target. Since January 2021, the highest year-over-year inflation rate was June's 9% rate but has declined in subsequent months. The monthly inflation rates, annualized, are much more volatile than the year-over-year rates, but have been lower starting in mid-summer. From July to December, annualized monthly inflation rates have averaged 1.9%, or just under the Fed's inflation target. This suggests that the Fed has largely succeeded in getting inflation back to its target, and it further suggests that the Fed may be able to carefully reconsider further increases in its policy rate (the interest rate on reserve balances).
We have been critical of the Fed's actions on inflation, arguing that it was too slow to acknowledge the problem of rapidly accelerating inflation, and too slow to respond even after it acknowledged the issue. We have also blamed the Fed's new operating strategy outlined in its 2020 Statement on Longer-Run Goals and Monetary Policy Strategy for its complacency when inflation began to rise. Nothing in the data to date has led us to change that assessment. But we also want to give the Fed its due. Once it finally started acting, it moved quickly, and the evidence is suggestive that the Fed has restored the inflation process to be in the neighborhood of its 2% goal. Moreover, this has happened without a recession and in the midst of a strong labor market with continuing low unemployment rates. The coming months will indicate whether or not this apparent success is transitory, to use a word perhaps overused by the Fed in 2021. However, the last six months of data strongly suggests that the Fed has succeeded in restoring inflation to target while, so far, avoiding a recession.
From November to December, the index decreased by 0.1%, which translates to an annualized rate of about -1%. This month-to-month change follows the small positive annualized rate realized from October to November of +1%.
As mentioned in our previous post on peak inflation, while the year-over-year increase remains well above the Federal Reserve's target rate of 2%, the low annualized month-to-month increase is well below this target. While monthly inflation rates are volatile, the recent string of lower monthly inflation rates suggests that inflation peaked last summer and is now much lower than in the first half of 2022. In fact, from June to December the CPI increased just under 1%, which translates to an annualized rate of just under 2%. By this measure, the Fed has been at or near its target rate for the last six months.
Figure 1 illustrates how prices, wages, and inflation-adjusted wages have changed from January 2021 to December 2022. This has been a period of declining real wages, and currently the purchasing power of wages is 3.5% lower than in January 2021. However, just as with inflation, the path of real wages changed in June 2022. Since June, real wages have increased by 1.3%. Annualized, this is a pace of 2.5% per year. Workers are finally seeing an increase in their purchasing power. So, the news is mixed - we've seen a long-term overall decline in purchasing power of wages, but recently a sustained upward trend.
Figure 2 presents the year-over-year inflation rate along with the annualized month-to-month inflation rate and the Federal Reserve's 2% inflation target. Since January 2021, the highest year-over-year inflation rate was June's 9% rate but has declined in subsequent months. The monthly inflation rates, annualized, are much more volatile than the year-over-year rates, but have been lower starting in mid-summer. From July to December, annualized monthly inflation rates have averaged 1.9%, or just under the Fed's inflation target. This suggests that the Fed has largely succeeded in getting inflation back to its target, and it further suggests that the Fed may be able to carefully reconsider further increases in its policy rate (the interest rate on reserve balances).
We have been critical of the Fed's actions on inflation, arguing that it was too slow to acknowledge the problem of rapidly accelerating inflation, and too slow to respond even after it acknowledged the issue. We have also blamed the Fed's new operating strategy outlined in its 2020 Statement on Longer-Run Goals and Monetary Policy Strategy for its complacency when inflation began to rise. Nothing in the data to date has led us to change that assessment. But we also want to give the Fed its due. Once it finally started acting, it moved quickly, and the evidence is suggestive that the Fed has restored the inflation process to be in the neighborhood of its 2% goal. Moreover, this has happened without a recession and in the midst of a strong labor market with continuing low unemployment rates. The coming months will indicate whether or not this apparent success is transitory, to use a word perhaps overused by the Fed in 2021. However, the last six months of data strongly suggests that the Fed has succeeded in restoring inflation to target while, so far, avoiding a recession.