There’s hope for a soft landing yet

Food inflation—also a casualty of the war—increased by 0.3%, but this was smaller than the 0.5% increase in November and 0.6% in October. The rate of food inflation is slowing, in other words.

Prices of used vehicles fell by 2.5%, continuing a decline that set in around July. New vehicle prices dropped by 0.1% in December, having remained unchanged the previous month.

The prices of “shelter,” as the CPI data refers to it, continued to remain hot, moving up 0.5% from November to December. But with private indicators showing asking that rents are already backing down, eventually the shelter component of the CPI will also begin to fall.

“The direction of travel is welcome news but of insufficient magnitude to sway the Fed, and Jerome Powell, from its hawkish stance,” said John Leiper, the chief investment office at Titan Asset Management.

The new CPI data makes it more likely that the Fed will settle for a 25-basis-point hike in interest rates in February, a relief from the recent diet of 75- and 50-basis-point increases. Certainly markets seemed to believe that, surging in the wake of the release of inflation figures. But Leiper pointed out that a soft hike in February “doesn’t gel with Fed committee member comments on front-loading the remaining rate rises and indications that the terminal rate may well settle above 5%.” In other words, the Fed may well remain unconvinced by December’s further evidence of a deflationary economy.

Fed officials have said in the past that they see a real possibility of a soft landing—slowing inflation without causing a recession—and are aiming for one. But the Fed’s summary of economic projections predicts an increase of around around a percentage point in the unemployment rate in 2023—the kind of magnitude, noted the labor advocacy firm Employ America, that usually results in a recession.

📬 Sign up for the Daily Brief

Our free, fast, and fun briefing on the global economy, delivered every weekday morning.