Inflation Dropped Sharply in December. Could Consumers Soon Get Relief?

There's some very positive news on the inflation front that just came out.

It's fair to say that 2022 was a tough year for many consumers. Not only did the stock market have a terrible 12-month run, but inflation wreaked havoc on a lot of people's finances, driving up the cost of everything from food to housing to transportation.

Meanwhile, many people raided their savings accounts as a result of the COVID-19 pandemic, to cope with income loss and missed work. So by 2022, a lot of people didn't have much cash to tap to cover that increase in expenses. The result? Costly credit card debt for a lot of people who would've no doubt preferred to steer clear of it.

But in recent months, the rate of inflation has been dropping. And while it's still high, the rate of inflation actually decreased nicely from November to December. That's a positive sign for consumers in more ways than one.

Inflation is still high, but softening

In December, the Consumer Price Index (CPI), which measures changes in the cost of consumer goods, dropped 0.1% compared to November. And on an annual basis, it rose 6.5% compared to December 2021.

Now, 6.5% is a high level of inflation. But when we compare it to the annual 7.1% CPI reading we saw in November, it's clearly a nice drop.

Plus, in June 2022, the CPI came in at 9.1% on an annual basis. But since then, the index has dropped steadily.

Of course, there's a clear difference between the CPI's annual November reading and its annual December reading -- a difference of 0.6%. The 0.1% monthly drop from November to December may seem less significant.

But it's worth noting that the last time the CPI decreased on a monthly basis was May 2020. So all told, December's CPI report was a positive one. And if the rate of inflation continues to slow month after month, consumers could be in for notable relief at some point in 2023 -- maybe even by the midpoint of the year, depending on how inflation trends.

Will a positive CPI reading give consumers a break from interest rate hikes?

Right now, consumers aren't just grappling with sky-high living costs. They're also looking at really expensive borrowing rates on just about everything, from mortgage loans to auto loans to personal loans. That's because the Federal Reserve has been aggressively hiking up interest rates in an effort to discourage a pullback in consumer spending that could help slow the pace of inflation even further.

If the Fed is happy with December's CPI reading, it may decide to go easy on its next rate hike and make it a minimal one. And that, too, could spell relief for consumers.

The Fed doesn't set consumer borrowing rates directly. However, when it raises its federal funds rate, which is what banks charge each other for short-term borrowing, the cost tends to get passed along to consumers. If inflation continues to slow down and the Fed eases up on rate hikes, it could make 2023 a much easier year for a lot of people, financially speaking.