2022 was the year of inflation and the Federal Reserve (Fed). The combination of the two – rising prices and a tightening monetary policy – contributed to a slowing economy, rapidly rising interest rates, and significant losses in the stock market. The war in Ukraine also contributed to global economic adversity, particularly in Europe.
The Fed raised rates 0.5% in December, bringing the total increase for the year to 4.25%. The hikes have helped slow the economy, while raising rates on credit cards and other debt. Rising mortgages rates have also put a damper on home sales. Thirty-year mortgages have climbed more than 3%, from 3.11% at the end of 2021 to 6.42% at the close of 2022, according to the Fed. On the flip side, savers and investors are now earning a better return on their savings and bond investments, with yields climbing more than 2% on 10-year Treasuries.
But while inflation continues to impact the economy, the Fed’s monetary tightening efforts have started to have an effect on prices. The Consumer Price Index (CPI), a common measure of inflation, was up just 0.1% over the previous month in November, according to the December 13 report from Bureau of Labor Statistics (BEA). Over the previous 12 months through November, the cost of goods and services, as measured by CPI, increased by 7.1%. That was the lowest 12-month increase since December 2021.
Excluding food and energy, the CPI increased just 6.0% over that 12-month period. The energy index jumped 13.1% during that period, while the food index rose 10.6%. However, both increases were smaller than for the 12-month period ending the previous month.
Despite the rate hikes, gross domestic product (GDP) growth was strong in the 3rd quarter, up 3.2%, after a 0.6% decline in the 2nd quarter. According to the BEA, the 3rd quarter increase was due primarily to an upsurge in exports and rising consumer health care expenditures.
Employment has remained strong, with job growth reaching 24 consecutive months in December. However, wage growth has slowed, with average earnings increasing by just 0.3% in December.
Fed Chair Jerome Powell has indicated that the rate hikes will continue until inflation is under control, with more increases expected during the first two quarters of 2023.
The higher rates have already affected the once-thriving manufacturing sector. Manufacturing activity declined in December for the second straight month after 30 consecutive months of growth, according to the Institute for Supply Management (ISM) report issued January 2. Aside from growth in the energy and metals industries, all 13 other industries reported a slow-down in activity. On the positive side, delivery times have improved, and prices have retreated modestly.