Will December's Positive Inflation Report Put an End to Steep Interest Rate Hikes?

Consumers could be in for some relief on the borrowing front.

For pretty much all of 2022, inflation wreaked havoc on consumers. That forced many people to go to extremes such as raiding their savings accounts and racking up credit card balances just to cover their basic expenses, like food, healthcare, and housing.

The Federal Reserve, meanwhile, has been doing what it can to address the issue of inflation. In 2022, the central bank implemented a series of aggressive interest rate hikes to drive the cost of borrowing upward.

The logic there is that if borrowing becomes too expensive for consumers, they'll start to cut back on spending. That could help narrow the gap between supply and demand that's been causing inflation to persist at such aggravatingly high levels.

Of course, expensive borrowing is a burden for consumers at a time when living costs are also up. But December's Consumer Price Index (CPI) that was just released had some positive news on the inflation front. And it could lead to relief for consumers in multiple ways.

Will the Fed start to slow down on rate hikes?

In December, the CPI rose 6.5% on an annual basis. Historically speaking, that's a big increase. But it's substantially lower than the 7.1% annual increase recorded in November. And it's also a lot lower than the June 2022 reading, which had inflation peaking at 9.1%.

If the Fed ends up happy with December's CPI reading, it might go easy on interest rate hikes for the foreseeable future. So consumers might get relief in the form of not just lower living costs, but also a less drastic increase in borrowing costs.

But the aforementioned "if" is a big one. The Fed does not seem inclined to back down in its fight to bring inflation down to more moderate levels. In fact, in late November of 2022, Fed Chair Jerome Powell said, "For wage growth to be sustainable, it needs to be consistent with 2% inflation."

Clearly, 6.5% inflation is a far cry from 9.1%. But it's also a far cry from 2%. In fact, even if inflation continues to cool nicely month after month, we may not get down to 2% inflation at any point in 2023. So all told, while December's CPI data could lead the Fed to slow down its interest rate hikes, that's not guaranteed.

Consumers should borrow with caution

Even if the Fed dials back on interest rate hikes, the reality is that right now, it's expensive to borrow money in just about every form, whether it's a personal loan, an auto loan, or a credit card balance. So consumers should make every effort to borrow carefully and make sure they can manage whatever debt payments they lock themselves into.

Of course, avoiding debt altogether is really ideal right now, especially with so many recession warnings looming. But if the Fed slows down on interest rate hikes, we might manage to avoid the dreaded recession so many experts have been cautioning about.