The Federal Reserve’s efforts to combat inflation have seen some success, but the next phase of the battle will focus on tackling rising costs in the services sector.
According to the latest data from the Bureau of Labor Statistics, the headline consumer price index increased by 3.4% in December on an annual basis. Although this figure still exceeds the Fed’s 2% inflation target, the rate of price growth has considerably slowed down since peaking at 9.1% in June 2022.
While the prices of goods and commodities have experienced a slowdown, services have continued to see faster price increases. Whether it’s dining at restaurants or seeking medical care at hospitals, the cost of services has been on the rise. This can be partially attributed to a strong labor market, which has led to higher costs for service providers.
In contrast, core goods inflation, which excludes the more volatile food and energy prices, remained unchanged in December compared to the previous month. Excluding used cars, which experienced a 0.5% price increase last month, prices of other core goods actually decreased in December due to improvements in supply chains.
However, the issue of services inflation remains persistent. Prices rose by 0.5% in December compared to the previous month and were 4.9% higher on an annual basis. Economists raise concerns that this stubbornness in services inflation could impact the Fed’s plans for interest-rate cuts later in the year.
Bank of America economist Stephen Juneau highlighted this concern, stating, “The ongoing divergence between goods and services inflation should keep the Fed from declaring victory on inflation. Until we witness further progress on services inflation, the Fed will likely maintain a level of anxiety regarding potential upside risks to inflation.”
The Strength in Service Prices Across Various Sectors
Service prices are exhibiting significant strength across a range of sectors, demonstrating a divergence from inflation in goods.
Food Costs: Exploring a Shift in Eating Habits
Prices for food at grocery stores experienced a marginal increase of 0.1% in December compared to the previous month. On the other hand, dining out at restaurants saw a more notable rise of 0.3%. When we consider the same period from a year ago, eating at home has become 1.3% more expensive, while the cost of dining out has risen by 5.2%.
Television vs. Streaming: A Financial Comparison
While television prices have decreased by 10% over the past year, cable, satellite, and livestreaming services have become 5.6% more expensive. This price discrepancy highlights a shift towards alternative forms of entertainment consumption.
The Changing Dynamics of Pet Care
Inflation in pet food and toys has slowed down to 3.1% from its previous rate of over 10% in early 2023. However, the costs associated with veterinary visits have experienced a steep increase of 11% over the past year. It is essential to consider these rising expenses when caring for our beloved furry friends.
Healthcare Costs: Escalating Prices in Medical Care
Medical care costs showed a 0.7% increase in December compared to the previous month. Dental expenses have risen by 5% since last year, while the cost of outpatient visits to hospitals has surged by 6.7%. The aging population may play a role in sustaining inflation within the healthcare sector.
Housing: A Key Contributor to CPI Gains
Shelter costs continue to be a primary driver of Consumer Price Index (CPI) gains. Rent inflation remains above pre-pandemic levels, with another 0.4% increase observed in December compared to the previous month. On an annual basis, rent prices have risen by 6.5%.