Inflation, Consumer Spending Cool Down

The Federal Reserve's preferred inflation gauge eased further in December, and consumer spending fell — the latest evidence that the Fed's series of interest rate hikes are slowing the economy.

Friday’s report from the Commerce Department showed that prices rose 5% last month from a year earlier, down from the 5.5% year-over-year increase in November. It was the third straight drop.

Consumer spending, as measured by personal consumption expenditures, or PCE, fell 0.2% from November to December and was revised lower to show a drop of 0.1% from October to November. Last year's holiday sales were sluggish for many retailers, and the overall spending figures for the final two months of 2022 were the weakest in two years.

The Fed has been steadily driving up borrowing rates across the economy, seeking to slow spending, growth and the surging prices that have bedeviled the nation for nearly two years. Last year, the Fed raised its benchmark rate seven times, and next week it's set to do so again.

The central bank's key rate, which affects many consumer and business loans, is now in a range of 4.25% to 4.5%, up from near zero last March.

Though inflation has been decelerating, most economists say they think the Fed's harsh medicine will tip the economy into a recession sometime this year.