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Inflation rose slightly in December, offering the latest sign that the economy has made significant progress since prices spiked to four-decade highs but that there’s still a ways to go, especially on housing costs, which dominate the budgets of households nationwide.

Data released Thursday by the Bureau of Labor Statistics showed prices rose 3.4 percent in December compared with the year before, a slight increase from <a href="https://www.washingtonpost.com/business/2023/12/12/cpi-fed-inflation-economy/" target=_blank>November’s annual inflation rate of 3.1 percent</a>. Prices also rose 0.3 percent in December over the previous month.

Since price increases peaked at 40-year highs in mid-2022, inflation has come down significantly, giving families more breathing room on <a href="https://www.washingtonpost.com/business/interactive/2022/why-gas-prices-so-high/" target="_blank" class="contextual_link">gas prices</a>, grocery costs and airfares. But rent costs have proved so sticky that they continue to drive the overall inflation snapshot month after month — accounting for more than half of the total monthly increase in December. Specifically, rent costs were up 0.4 percent compared with the month before, after a few months of rising 0.5 percent. Compared with December 2022, rent costs were up 6.5 percent.

The glaring question, then, is when housing price increases will decline in a way that pushes broader inflation down to normal levels and brings long-delayed relief for millions of tenants.

Experts are hopeful that the market will keep easing as more homes become available and construction projects for houses and apartments wrap up. And policymakers bet that once rent costs finally cool off, that will have a major effect on the entire inflation picture.

“The temperature has just come way down,” said Mark Zandi, chief economist of Moody’s Analytics. “They realize this is going to happen, and everything else is kind of falling into place.”

But the new supply won’t necessarily cause rents to fall, and experts still caution that it will take time for relief to be felt throughout the market. Plus, it’s unclear whether high interest rates are having their intended effect on the housing market. Federal Reserve officials have said rates will stay “higher for longer,” until there’s certainty that price growth will return to normal levels. But much of the drop in inflation over the past 18 months has come from supply chains easing and energy prices plummeting — not from a drop-off in consumer or business demand. The housing market itself experienced only a <a href="https://www.washingtonpost.com/business/2023/07/17/housing-market-recession/" target="_blank">brief downturn</a> as rates climbed, despite being one of the industries most sensitive to borrowing costs.

Lindsay Owens, executive director of the Groundwork Collaborative, a left-leaning think tank, said the continued strength of the labor market and the persistence of housing inflation in particular suggest steep borrowing costs aren’t the perfect match for the current economic picture. She said, “We’re at great risk of higher for too long, at this point.”

“Today’s report is a glaring sign about some long-standing supply issues on the housing side,” Owens said. “And that absolutely gets worse in a high-interest-rate environment.”

Energy costs also nudged the inflation rate up, as a rise in electricity and gasoline prices offset a drop in natural gas costs. Car insurance also rose 1.5 percent in December — and popped a notable 20.3 percent over the year before.

Diane Swonk, chief economist at KPMG, said she is keeping an eye on insurance costs in particular, including for cars and homes. Those categories fall under what is known as “services inflation,” which hasn’t eased as much as inflation for basic goods, such as lumber or couches or refrigerators.

“That could create a floor under inflation, which would be problematic,” Swonk said.

The snapshot isn’t expected to shake up the Fed’s ongoing fight against inflation or change basic understandings of how the economy is faring. Officials at the central bank and the White House have long warned that getting inflation down to more normal levels will take time and include bumps along the way. It’s not yet clear exactly when the Fed will shift from keeping rates steady to cutting them, which officials do expect to happen this year.

Major stock market indexes bounced around throughout the day, and all closed essentially flat.

Overall, though, there is no denying that the economy is in a better position than just about anyone expected. Inflation has come down significantly since peaking at 9.1 percent in mid-2022. The labor market added 2.7 million jobs <a href="https://www.washingtonpost.com/business/2024/01/05/december-jobs-unemployment/" target=_blank>in 2023,</a> with an average monthly gain of 225,000 jobs. Consumer spending is powering economic growth and <a href="https://www.washingtonpost.com/business/2023/12/26/holiday-sales-retail-mastercard/" target=_blank>stayed strong</a> through the holiday season.

Americans tell us why they’re feeling better — or worse — about the economy

All that is despite the Fed’s moves to aggressively slow the economy by hiking interest rates to the highest level in 22 years, a bid to wrestle prices back under control. Forecasters overwhelmingly warned that the central bank’s sprint would tip the country into a recession. But month after month, major pillars of the economy are staying resilient, and inflation is inching closer to a more normal 2 percent, using the Fed’s preferred gauge.

And still, there is no downturn in sight.

“What we’re seeing now, I think, we can describe as a soft landing, and my hope is that it will continue,” Treasury Secretary Janet L. Yellen <a href="https://twitter.com/atrupar/status/1743296114902573552?s=20" target=_blank>told</a> CNN this month.

Biden’s economy vs. Trump’s, in 12 charts

Still, plenty of households say they aren’t feeling the kind of “soft landing” that economists and policymakers applaud. For starters, prices aren’t returning to pre-pandemic levels, even if they aren’t rising as fast anymore. Polls and survey data routinely show that many Americans think they were better off before <a href="https://www.washingtonpost.com/elections/candidates/joe-biden-2024/" target="_blank" class="contextual_link">Joe Biden</a> became president, although their <a href="https://www.washingtonpost.com/business/2023/11/24/bigmac-price-tiktok-biden-economy-inflation/" target=_blank>behavior and spending habits</a> aren’t changing as a result. This week, an <a href="https://d3nkl3psvxxpe9.cloudfront.net/documents/econTabReport_wOkNqe4.pdf" target=_blank>Economist-YouGov poll</a> found that 22 percent of Americans said the economy was getting better, while 27 percent said it was about the same and 45 percent said it was getting worse.

That poses a thorny challenge for Biden’s reelection campaign. The White House is pushing to trumpet the economy’s strength while also acknowledging palpable frustration over housing costs and other essentials. In a statement Thursday, Biden pointed to his administration’s efforts to lower costs for insulin, prescription drugs and energy, and to eliminate hidden<a href="https://www.washingtonpost.com/business/2023/12/01/biden-price-gouging-inflation/" target="_blank"> junk fees. </a>He also criticized “extreme Republicans” for having no plans of their own to lower inflation.

Meanwhile, Donald Trump’s campaign has taken to slamming the Biden economy, high inflation and high mortgage rates, even as the former president vows his own <a href="https://www.washingtonpost.com/business/2024/01/07/trump-economy-inflation-biden-campaign/" target=_blank>s</a><a href="https://www.washingtonpost.com/business/2024/01/07/trump-economy-inflation-biden-campaign/" target=_blank>weeping changes</a> to the economy that threaten to reignite price hikes.

Everyone expected a recession. The Fed and White House found a way out.

Some economists speculate that it will take time for the economy’s strengths to feel more tangible. The past few years were dizzying, and it wasn’t that long ago that households saw grocery costs or rent bills climb at a breakneck pace or that businesses faced the prospect of yet another recession.

“It may take a little bit of time for Americans to really feel confident, that the good economic numbers that they’re seeing and their own good personal situations [are] actually going to be sustained,” Lael Brainard, a former top Fed official who runs the White House’s National Economic Council, <a href="https://www.bloomberg.com/news/articles/2024-01-10/lael-brainard-on-the-white-house-s-role-in-bringing-down-prices?srnd=oddlots&amp;embedded-checkout=true" target="_blank">told Bloomberg’s “Odd Lots”</a> podcast this month.

Fed officials, for their part, still have work to do. But they are comfortable at least setting the stage for <a href="https://www.washingtonpost.com/business/2023/12/13/fed-interest-rate-decision-inflation-fomc/" target=_blank>multiple interest rate</a> cuts this year. Some Fed watchers think the pivot could begin in the spring. (Central bankers have their first meeting of the year later this month. After that, they plan to convene in March.)

“We kind of assume that it will get harder from here,” Federal Reserve Chair Jerome H. Powell said of the inflation fight at a December news conference. “But so far it hasn’t.”

Yale University, BA in History

Rachel Siegel is an economics reporter covering the Federal Reserve. She previously covered breaking news for the Post's financial section and local politics for the Post's Metro desk. Before joining the Post in June 2017, Rachel contributed to The Marshall Project and The Dallas Morning News.

Rachel Siegel

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Inflation rose slightly in December as fight to tame prices continues

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