As US inflation eases off 40-year high, Fed likely to ease off on back-to-back jumbo rate hikes

US inflation is at its lowest level in 15 months, fuelling speculation the Federal Reserve will step back from further jumbo interest rate hikes in 2023,

Official figures out today show the rate of price increases in the world’s largest economy fell to 6.5 per cent in December, down from 7.1 per cent in November, according to the US Bureau of Labor Statistics.

The rate is now running at its weakest level since October 2021.

December’s drop also marks the sixth month in a row inflation, measured annually, has fallen after it peaked at just nine per cent last summer.

The figures were in line with Wall Street’s expectations.

Inflation has now seemingly passed its peak and is on a downward path over the coming year, possibly sealing a big slowdown in the Fed’s aggressive interest rate hike campaign.

In 2023, Fed officials, led by chief Jerome Powell, signed off over 400 basis points of interest rate rises between March and December, the fastest rate of financial tightening since former Fed chief Paul Volcker led the charge against inflation in the 1980s.

That cycle included four back-to-back 75 point increases.

The rate of core inflation – a more accurate measure of underlying price pressures in an economy as it strips of volatile items – fell to 5.7 per cent from six per cent.

On a monthly basis, core prices actually jumped 0.3 per cent, signalling there are some underlying inflation pressures the Fed needs to address.

Investors ramped up bets on the world’s most influential central bank lifting borrowing costs 25 basis points at its next meeting on 1 February after today’s data. That would be the flattest rise since last March.

Today’s US Bureau of Labor Statistics’s numbers provide more evidence that the global inflation over the past 18 months seems to have turned a corner.

In Europe, the rate of price increases has dropped for the past few months after reaching the hottest level since the creation of the euro in 1999.

Britain’s price problem also seems to be running out of steam. Inflation dropped from a peak of 11.1 per cent in October to 10.7 per cent in November, and the likes of the Bank of England and Office for Budget Responsibility think it will steadily decline in 2023.