The taming of inflation hit a snag in December as the pace of gains in consumer prices speeded up from November. The data provide evidence the Federal Reserve’s fight to bring back price stability isn’t over and could spoil investors’ hopes for early rate cuts.
The consumer price index climbed 3.4% year over year last month, an acceleration from the 3.1% pace logged in November, according to data released Thursday by the Bureau of Labor Statistics. While that is down significantly from the 6.5% recorded in December 2022, last month’s number was a surprise. The consensus call among economists surveyed by FactSet pointed to a gain of 3.2%.
On a month-over-month basis, the headline index rose 0.3%, driven largely by rising housing prices. The bureau’s index for shelter rose 0.5% in December, accounting for more than half the monthly increase in the overall inflation rate. Economists had expected the headline number would rise to 0.2% from 0.1% in November.
While shelter costs are proving stubborn, economists largely expect housing inflation to moderate in coming months, which in turn should help bring price growth closer to the Fed’s 2% target, according to Sam Millette, director of fixed income for the Commonwealth Financial Network.
“The slightly higher than expected inflation figures in December indicate that there is still real work to be done to get inflation to target,” Millette wrote in a research note. It’s worth noting, however, that while the pace of shelter inflation increased on a monthly basis, the annual inflation rate for housing was 6.2% in December, down slightly from the surprisingly strong 6.5% recorded in November.
While the pace of headline inflation was on the rise in December, core CPI—a metric that excludes the more volatile food and energy indexes and is generally considered a better gauge of underlying trends—continued to decline. Core CPI growth slowed to 3.9% year over year in December from 4% in November, a welcome decline that still fell short of expectations. Economists had forecast that last month’s core CPI rate would slow to 3.8% year over year.
On a monthly basis, core CPI rose 0.3%, holding steady with the November result and in line with expectations.
“The headline number came in hotter than expected and core CPI came in line with expectations,” wrote Alexandra Wilson-Elizondo, co-chief investment officer for multi-asset solutions at Goldman Sachs Asset Management. “This print should challenge the markets’ expectations of rate cut timing.”
While there is nothing in Thursday’s report to cause the Fed to hurry to cut rates—investors expect a first reduction as soon as the bank’s March meeting—the data do keep the door open for the economy to achieve a soft landing, she said. The fact that the latest figures show inflation, particular core CPI, isn’t extremely hot means policymakers won’t have to slam the brakes so hard as to unleash a recession.
The so-called “supercore” inflation measure—services excluding energy and shelter—-rose 0.4% in December and matched November’s increase, wrote Bill Adams, chief economist for Dallas-based
Comerica Bank.
On an annual basis, supercore CPI rose 3.9%, also remaining generally unchanged from November.
Fed policymakers have pointed to the importance of this metric because it cuts through the recent volatility in housing costs and is more sensitive to shifts in the labor market. That is particularly helpful given that persistent shortages of workers could keep boosting wages, making inflation harder to beat.
Looking at individual elements within the December data, the cost of insuring motor vehicles shot up again on a monthly basis, helping to lift the headline inflation rate. The index for motor vehicle insurance, which had been rising fast through most of 2023, increased by 1.5% from November. It had risen 1% in November from October.
Used car and truck prices also ticked up 0.5% over the month. That was a fairly strong clip, but slower than the 1.6% pace recorded in November. The pace of inflation in medical care, recreation, new vehicles, education, and airline fares was also higher in December.
And while consumers saw fuel prices fall at the pump last month, the bureau’s gasoline index increased by 0.2% in December after adjustments for seasonal variances. That meant that it didn’t offset increases in other categories as economists had expected.
Without seasonal adjustment, gasoline prices fell 5.8% in December, according to the bureau. A moderate increase in electricity prices, meanwhile, sent the overall energy index up 0.4% after two straight monthly declines.
When it comes to food costs, Americans are seeing a bit of relief. The rate of inflation for groceries remained steady on a monthly basis, with costs increasing 0.1% in December. On a yearly basis, the bureau’s index of the cost of food at home rose just 1.3% in December. The inflation rate for dining at restaurants and takeout actually slowed slightly, with price growth of 0.3% in December, down from the 0.4% rate in November. Year over year, the index for food away from home rose 5.2% over the past year.
Prices for household furnishings fell 0.4% in December, along with several other categories of durable goods, including furniture and appliances. It shows that inflation for goods and for services are on different trajectories at the moment. Gains in the cost of goods are returning to normal levels, while services inflation remains more persistent.
Thursday’s overall uptick in headline CPI is a critical reminder of the “unpredictable nature of economic recovery and the murkiness of the macro-economic data,” wrote Jon Maier, chief investment officer at Global X. No one really knows what comes next, so investors shouldn’t count on rate cuts. The Fed could maintain or even intensify its restrictive monetary policy stance in response to inflationary pressures, he said.
Corrections & Amplifications: Alexandra Wilson-Elizondo is the co-chief investment officer for multi-asset solutions at Goldman Sachs Asset Management. An earlier version of this article incorrectly identified her by a previous title.
Write to Megan Leonhardt at megan.leonhardt@barrons.com
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