Bay Watch: Have We Really Turned the Corner on Inflation?

New data released this week by the Bureau of Labor Statistics had markets excited about easing inflation readings for the month of December. With inflation numbers down, many investors are beginning to hope that Federal Reserve interest rate hikes will slow as we move further into 2023. While the headline readings were indeed good news for overall inflation – the consumer price index for all items produced its lowest year-over-year reading (+6.5%) since 2021, and it actually declined month-over-month (-0.1%) – the underlying data shows that inflation has not disappeared.

Notably, inflation for services continues to run upward. While prices for energy and other goods have moderated as supply chain issues have resolved themselves over the course of 2022, a tight labor market has pushed wages higher – meaning the service industry must charge more to cover its costs. Inflation readings for core services (which exclude energy services) in December were up 7.0% year-over-year and they rose 0.5% month-over-month. The month-over-month increase is particularly concerning as it reverses a two-month trend of slower growth in service prices. The high inflation numbers for services also contributed to pushing the core consumer price index (excluding energy and food) to its highest month-over-month reading (+0.3%) since September 2022.

The upward pressure on service prices is a direct result of a continued mismatch between the number of available job openings and the number of people looking for work. In November, there remained over 10 million job openings in the U.S. – a number that has come down in the last 12 months, but still remains far higher than pre-pandemic levels. Federal Reserve actions in 2022 appear to have worked in moving businesses to reduce their hiring plans, but the number of job openings must continue to come down in order for service sector inflation to moderate. Read more Bay Watch analysis from the Bay Area Council Economic Institute.