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US inflation drops to 6.5%, lowest in over 12 months

Winnie Kimeu

Writer, News

Jan 12, 2023 at 06:57

The United States is well on its way to victory in the war against inflation. 

According to data released by The Bureau of Labor Statistics on Jan 12, 2023, inflation at the close of 2022 stood at a rate of 6.5%. This marks the sixth consecutive decline in the year-on-year rate and the lowest level since October 2021.

Here’s why inflation is going down:

  • The Federal Reserve’s assertive increase in interest rates: After four consecutive increases of 0.75 percentage points, the Federal Reserve deemed it necessary to slow down and observe the ramifications of the tightening of monetary policy in December 2022.
  • Data released on Jan 12, 2023, backs this notion that rate hikes will happen at a more leisurely pace than before.  Therefore opting for a 0.5-point increase, bringing it up to the range of 4.25–4.5%.
  • The decline of global oil prices (and gasoline prices) from pre-summer highs also plays a part in the drop in inflation. Moreover, the index for gasoline is the primary reason behind the decrease in the overall prices of monthly items, outweighing the increases in the shelter indexes.
Chairman Jerome Powell - Federal Reserve
Chairman Jerome Powell – Federal Reserve

A breakdown of the indexes:

  • The Consumer Price Index for All Urban Consumers (CPI-U) took a nosedive of 0.1% in December 2022, following a slight uptick of 0.1% in November 2022, factoring in seasonally adjusted data.
  • The food index had a growth of 0.3% over the month of December 2022, with the food and home index experiencing a 0.2% boost. 
  • The energy index, on the other hand, experienced a decline of 4.5% over the month as the gasoline index dropped. Other major energy component indexes went up.
  • Core inflation, which does not include the prices of energy and food consumed at home, has also decreased from 6.0% in November 2022 to 5.7% at the close of the year.
  • Unemployment is at an all-time low of 3.5%

More good news

The newly released data is a breath of fresh air for US President Joe Biden, whose approval ratings were notably impacted by the price hikes. The speed of price hikes still remains well above the Federal Reserve’s 2% price stability target, but it’s a sigh of relief for Chairman Jerome Powell. 

“Price stability is the bedrock of a healthy economy and provides the public with immeasurable benefits over time. But restoring price stability when inflation is high can require measures that are not popular in the short term, as we raise interest rates to slow the economy. The absence of direct political control over our decisions allows us to take these necessary measures without considering short-term political factors.” Powell.

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Bitcoin has been on a roll for the past nine days, marking the first time since July 2021 that it has seen such a streak of growth. BTC has seen a surge of around 8% in recent days, consistently breaking past $17,000 and reaching the $18,000 milestone.

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Recession a thing of the past

In the past half-year, inflation has dropped from 9.1% in June 2022, but it still has a long way to go before it reaches the Central Bank’s target.

Inflation has dropped from 9.1%
Inflation has dropped from 9.1%

Many economists anticipate a recession, but they also predict it to be mild. Others are optimistic that the US will be able to evade it, given the robustness of the labor market. 

Faced with labor shortages and struggles in recruiting, companies are hesitant to lay off employees, unlike in previous situations when demand began to decrease, leading to a reinforcement of recessionary dynamics.

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