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Federal Reserve’s Key Inflation Gauge Sees 0.2% Uptick in December, Registers 2.9% Annual Increase

-Editorial

The latest data on inflation, released on Friday, revealed a moderation in the rate of price increases as 2023 concluded. In December, the Commerce Department’s personal consumption expenditures price index, a crucial metric for the Federal Reserve, rose by 0.2% every month and 2.9% annually, excluding food and energy. Economists surveyed by Dow Jones anticipated increases of 0.2% and 3%, respectively.

While core inflation saw a monthly uptick from 0.1% in November, the annual rate decreased from 3.2%, marking the lowest 12-month rate since March 2021. When factoring in volatile food and energy costs, headline inflation also increased by 0.2% for the month, maintaining a steady 2.6% annual rate.

A worldwide increase in inflation began in mid-2021, with many countries seeing their highest inflation rates in decades. It has been attributed to various causes, including pandemic-related economic dislocation, supply chain problems, the fiscal and monetary stimuli provided in 2020 and 2021 by governments and central banks around the world in response to the pandemic, and price gouging. Recovery in demand through 2021 ultimately led to historic and broad supply shortages (including chip shortages and energy shortages). Worldwide construction sectors were also hit.

In early 2022, the Russian invasion of Ukraine’s effect on global oil prices, natural gas, fertilizer, and food prices further exacerbated the situation. Higher gasoline prices were a major contributor to inflation as oil producers saw record profits. Debate arose over whether inflationary pressures were transitory or persistent, and to what extent price gouging was a factor. All Central banks (except for the Bank of Japan which has kept its interest rates steady at –0.1%) responded by aggressively increasing interest rates. The inflation rate in the United States and the eurozone began slowing in the second half of 2022, continuing into 2023.

Mark Zandi, chief economist of Moody’s Analytics, analyzed United States Consumer Price Index components following the May 2022 report that showed an 8.6% inflation rate in the U.S. He found that by then the 2022 Russian invasion of Ukraine was the principal cause of higher inflation, comprising 3.5% of the 8.6%. He said oil and commodities prices jumped in anticipation of and response to the invasion, leading to higher gasoline prices. The resulting higher diesel prices led to higher transportation costs for consumer goods, notably food.

Russian gas supply curbs, which began in 2021, aggravated the energy crunch caused by demand growth and global supply limitations during the post-pandemic restrictions recovery. In Europe, gas prices increased by more than 450%, and electricity by 230% in less than a year. On February 22, 2022, before the Russian invasion, the German Government froze the Nord Stream 2 pipeline between Russia and Germany, causing natural gas prices to rise significantly.

On February 24, Russian military forces invaded Ukraine to overthrow the democratically elected government and replace it with a Russian puppet government.

Before the invasion, Ukraine accounted for 11.5% of the world’s wheat crop market, and contributed 17% of the world’s corn crop export market, and the invasion caused wheat and corn from Ukraine unable to reach the international market, causing shortages, and result in a dramatic rise in prices, that exacerbated to foodstuffs and biodiesel prices. Additionally, the price of Brent Crude Oil per barrel rose from $97.93 on February 25 to a high of $127.98 on March 8, this caused petrochemicals and other goods reliant on crude oil to rise in price as well.

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