Inflation Surprises To The Upside, Weakening Case For Interest Rate Hikes

(KNSI) – The December inflation figure was released Thursday, coming in above expectations. A local expert says that may be a harbinger of things to come.

Prices rose 3.4% over the past year, accelerating from November’s mark. One of the main drivers of the increase was food prices, which can be a psychological shock for consumers. Economist King Banaian says it is similar to gasoline and its effect on overall sentiment.

“Gas prices are so important because we drive by gas stations all the time, we have signs to tell us what the price is today, and we have memories that tell us what the price was last week. And that’s what decides for us whether inflation is rising or falling, rather than a government statistic.”

Most families head to the grocery store at least once a week, sometimes more often, for essentials like milk or bread.

With polar air rushing in, utility bills are set to jump as furnaces work overtime against the cold. That eliminates some of the tailwinds for consumers that carried us during an extraordinarily mild December. According to the Bureau of Labor Statistics, energy costs were down two percent in December.

Banaian says the reversal of the general inflation trend could continue. “When you use the 12-month moving total of inflation, you’re dropping off the month that was 13 months ago and adding the latest. Thirteen months ago, inflation was certainly higher. So, you are actually taking advantage of the fact that the observation you were dropping was from a time when inflation was certainly higher.”

The inflation rate peaked in the summer of 2022 at over 9% with gasoline around $5.00 per gallon. Banaian says it was a lot easier to show improvement from that versus more recent comparisons. The inflation rate was at about 6% at the end of 2022, and pretty soon, we’ll be gauging inflation against months where the rate was around 3%.

Banaian says if inflation gets stuck above the Federal Reserve’s 2% target, it could keep interest rates higher for longer. The Fed Funds market currently predicts a 67% chance of a March interest rate cut. Banaian says he is less sure of a move that soon.

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