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US rate of inflation falls to 6.5 per cent

US Federal Reserve boss Jerome Powell (REUTERS)
US Federal Reserve boss Jerome Powell (REUTERS)

The US rate of inflation fell again last month from 7.1% to 6.5% raising fresh hopes that the global prices surge is past its peak.

The Consumer Prices Index (CPI) fell 0.1% over the month bringing the annual rate down to its lowest level since October 2021, according to the US Bureau of Labor Statistics.

US inflation peaked at 9.1% in June and has been falling steadily ever since. The December rate is in line with analysts’ forecasts.

But the drop is not thought to be quick enough to avert another interest rate rise from the Federal Reserve, headed by Jerome Powell, when it makes its decision on February 1.

It comes ahead of the publication of Britain’s inflation figure for December next Wednesday. Economists expect the UK Consumer Prices Index to fall further from the peak of 11.1% in October, a 41 year high. It eased slightly to 10.7% in November.

A bigger fall would take the pressure off the Bank of England to maintain the pace of interest rates hikes. The Bank’s official rate currently stands at 3.5% after the ninth consecutive rise in December. The Bank’s Monetary Policy Committee next meets on February 2.

Inflation spiked last year around the world after the Russian invasion of Ukraine sent wholesale energy prices and some food staples soaring. inflation had been rising anyway after the end of the Covid pandemic as major economies reopened and supply chains were disrupted by continuing restrictions in China. Inflation has started to ease as energy prices have come down from their peaks last summer.

Neil Shah, Executive Director at investment research firm Edison Group said: “Fuelled by lower than expected energy prices and a weakening second-hand car market, inflation is retreating at a slow but sustainable pace, repeatedly coming in at or below expectations.

“Investors have been clear that any negative surprises in CPI would set a pessimistic tone for the year ahead, yet the new figures – coupled with slowing wage growth – will reassure those who predict a return to healthy inflation by the end of the year. We continue to expect equity market volatility, however, as the market will remain highly reactive to key data to set the mood.”

Richard Carter, head of fixed interest research at investment firm Quilter Cheviot, said: “Inflation in the US continues its downward trajectory coming in at 6.5% in December, a number that is likely to be positive for markets hoping that the Federal Reserve slows its rate hiking schedule. Indeed, this print should point to a 0.25 percentage point rise at the next meeting, rather than what has become the more common 0.5 percentage point hike. The rhetoric from the Fed will need to be watched closely, however.

“It has been keen to stress that it remains in hawkish mode while the labour market is tight and the economy can handle it – it will likely claim that the battle against inflation continues rather than declare victory. As such, markets will remain volatile as each data print and statement is analysed for what it might mean for interest rates. We are a long way yet from getting through this current inflation malaise, and with recessionary talk ever present, the next moves of the Fed remain uncertain.”