Amid falling costs for gasoline and other products, consumer prices in the U.S. also declined in December for the first time in more than 2.5 years, signaling that inflation has entered a protracted downward trend.

The consumer price index decreased by 0.1% in December after increasing by 0.1% in November, the Labor Department reported on Thursday (Jan 12). Since May 2020, when the economy was suffering due to the initial wave of COVID-19 infections, there has not been a decrease in the CPI.

The CPI was expected to stay steady by economists surveyed by Reuters. After Thursday's government report indicated that inflation fell last month, the Federal Reserve is now expected to deliver just a quarter-point interest rate boost at its next meeting and is likely to eventually stop raising rates short of 5%.

Tom Barkin, president of the Richmond Federal Reserve, said: "We are in fact constraining the economy and presumably in the process constraining inflation. That means for me I can be a little more nuanced."

Following the release of the report, Fed funds futures climbed, and they continued to rise after Philadelphia Fed President Patrick Harker declared that quarter-point interest rate increases were now warranted.

Prices currently indicate a probability of around 95% that the Fed will only increase rates by a quarter of a percentage point at its next meeting from January 31 to February 1, compared to approximately 5% for a half-point hike. Last year, most of the Fed's rate hikes came in 75-basis-point increments as central bankers pushed to tighten policy fast to bring down 40-year-high inflation.

According to the statistics released on Thursday, consumer prices increased by 6.5% in the 12 months ending in December, which is still far higher than the Fed's target rate of 2% but is also the slowest rate in more than a year.

Traders also upped their bets on Thursday that the Fed will only make one more quarter-point rate hike before pausing at a range of 4.75 to 5 percent, and that it will subsequently lower rates in the second half of the year. Currently, the intended percentage range is 4.25 to 4.5.

"Disinflation is gaining momentum as we enter 2023, giving the 'all clear' for the Fed to ease off the rapid pace of monetary policy tightening," EY Parthenon chief economist Gregory Daco wrote. "We remain of the opinion that the Fed will only raise rates twice by 25 basis points in early 2023 and that it will pause its tightening cycle at 4.75-5.00%."