Capitol Report: Inflation nightmare on Main Street? Hardly. Easing prices take pressure off economy

Maybe the economy has little to fear from inflation after all.

The government on Friday said consumer prices fell in December for the first time in nine months, reducing the yearly rate of inflation to 1.9% from almost 3% just six months ago.

Worries about inflation and an overheating economy had spurred the Federal Reserve to jack up interest four times last year. The higher cost of borrowing dented housing sales, sparked a stock-market meltdown SPX, -0.23%   in December and fueled talk about a possible recession for the first time in almost 10 years.

Turns out, though, that underlying price pressures may not be all that worrisome.

Much of the increase in inflation last year was tied to a surge in the cost of oil, but a sharp decline in gasoline prices since last summer has eased the immediate threat. Energy prices actually fell in 2018 for the first time in three years.

The other primary sources of rising inflation last year were rents and the cost of services provided by the likes of hotels and restaurants.

There’s reason to think those costs will also ease soon.

In the housing market, for example, higher mortgage rates choked off rising home sales and caused price increases to slow. A deluge of new rental units could also cause rents to level off.

Read: Rental price growth is the slowest in nearly four years

That’s a big deal. Housing accounts for as much as 40% of household income and is the single biggest expense for most Americans.

The cost of services, meanwhile, rose in part by widespread increases in minimum wages across the country that won’t be replicated to the same degree in 2019.

The cost of other staples are also fairly tame. The price of groceries and other food eaten at home, for example, rose a scant 0.6% in 2018.

Medical care cost just 2% more last year than it did in the prior year, a relatively small increase compared to years past. That’s the second biggest expense for most individuals and families.

And prices for new cars and trucks, plane tickets, clothing and cell-phones all fell in 2018.

On the business side, companies are shelling out the biggest pay hikes in a decade. Yet so far rising wages — they are up 3.2% in the past year — haven’t led to widespread price increases or lower corporate profits.

Read: On the upswing: Worker pay after inflation is growing the most in two years

What does it mean for the Fed? The central bank can take it easy. Senior officials have signaled they are unlikely to raise interest rates anytime soon. They want to see how the economy performs in the spring and if inflation remains under wraps.

“This gives the Fed plenty of room to pause as there is no ‘real’ inflationary pressures building,” said Chris Gaffney, president of world markets at TIAA Bank.

Read: Powell says Fed is ‘watching and waiting’ on interest rates

How long the goldilocks scenario of steady economic growth, rising wages and low inflation can last is anyone’s guess. The tide could turn again, especially if the global economy shakes off a recent bout of weakness and oil prices CLG9, -1.73%  rebound.

“If the energy price decline is over — and especially if they rise modestly in coming months — then the recent weakness in inflation expectations probably will start to reverse,” said chief economist David Berson at Nationwide.

If the past few years are any indication, though, inflation is unlikely to rise much above the Fed’s 2% target — or stay there for very long.

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