Consumer Inflation in December Rises Most in Three Months

Consumer prices have been proving sticky in the US, accelerating the most in three months in December. The CPI increased 3.4% in the year through December. On a monthly basis, it also rose by more than forecast, up 0.3%, the most in three months and above forecasts of 0.2%. The CPI core, excluding food and energy rose 0.3% in December from a month earlier and on an annual basis increased 3.9%. The Fed favors the core metric as a better gauge of inflation trends.

Shelter prices, which make up about a third of the overall CPI index, rose 0.5% vs 0.4% last month, contributing over half of the monthly all items increase. This would not go unnoticed by the Fed wanting a sustained moderation in the shelter category as key to bringing core inflation down. That should continue to give the Fed some pause about cutting rates anytime soon.

Inflation

Treasury yields were slightly higher in response to the report. The 2-yr note yield, at 4.68% just before the data, rested at 4.70% after 4.74% immediately following the release. The 10-yr, at 4.18% before the report, jumped to 4.23% immediately after the release and pulled back to 4.22%.

The bond market reacted knowing Powell said the Fed would be watching very closely in terms of core PCE. Core CPI goods inflation continues to be sticky with rising consumer sentiment. We will look to the holiday shopping season with Christmas ahead.

US December 2023 Highlights

CPI

  • CPI (M/M) Dec: 0.3% (est 0.2%; prev 0.1%)
  • (Y/Y): 3.4% (est 3.2%; prev 3.1%)
United States Inflation Rate
United States Inflation Rate
United States Consumer Price Index (CPI)
United States Consumer Price Index (CPI) MoM

A reminder from August…

Core inflation:

  • CPI Core (M/M): 0.3% (est 0.3%; prev 0.3%)
  • CPI Core (Y/Y): 3.9% (est 3.8%; prev 4.0%)
United States Core Inflation Rate
United States Core Inflation Rate
United States Core Inflation Rate MoM

Real Earnings

  • Real Avg Hourly Earnings (Y/Y) Dec: 0.8% (prev R 0.9%)
  • Real Avg Weekly Earnings (Y/Y): 0.5% (prev R 0.6%)

Where the Prices Changed

Year on Year

  • Energy costs dropped 2% (vs -5.4% in November), with gasoline declining 1.9% (vs -8.9%), utility (piped) gas service falling 13.8% (vs -10.4%) and fuel oil sinking 14.7% (vs -24.8%).
  • Prices increased at a softer pace for food (2.7% vs 2.9%), shelter (6.2% vs 6.5%), new vehicles (1% vs 1.3%), apparel (1% vs 1.1%), medical care commodities (4.7% vs 5%) and transportation services (9.7% vs 10.1%)
  • Prices continued to decline for used cars and trucks (-1.3% vs -3.8%).

Monthly

  • The shelter index continued its upward trend (0.5% vs 0.4%), contributing over half of the monthly all items increase.
  • The motor vehicle insurance index saw a slight uptick by 1.5%, after a 1% rise in the previous month.
  • Used cars & trucks index rose 0.5%, compared to a 1.6% surge in November.
  • Other indexes that experienced growth in December included recreation, new vehicles, education, and airline fares.
  • Energy index went up by 0.4%, with rises in the electricity index (1.3%) and the gasoline index (0.2%) more than offsetting a decline in the natural gas index (-0.4%).
  • The food index also increased 0.2%, the same as in November.
  • The index for household furnishings & operations (-0.4%) and the index for personal care (-0.3%) were among those that declined during the month.

It appears the surge in prices is over with supply chains mostly healed. Services inflation is the directional key with consumer demand having shifted back toward services from goods.

Lower spending on goods, ongoing improvement in supply chains and falling shipping costs should continue to ease price pressures in coming months. The deflationary pull from improved supply chains will lessen with order now largely restored at US factories and ports. However, there are many possible shifts with the multiple geopolitical powder kegs out there with Russia and China.

A reminder we are coming off June 2022 9.1% inflation rate which was the highest in four decades. CPI has moderated after resurging in August with aggressive Fed interest rate rises.

The new data also reflects an update to the weights of goods and services in the spending basket to capture changes in consumer preference. The Labor Department previously updated every two years but starting with January’s release will revise them annually.

Services Inflation Peaked?

  • Annual services inflation in the United States eased to 5% in December 2023, the lowest since February 2022, from 5.2% in the previous month. Services Inflation in the United States averaged 4.45 Percent from 1950 until 2023, reaching an all-time high of 18.09 Percent in June of 1980 and a record low of 0.57 Percent in February of 2010.
United States Services Inflation

Market Reaction (updated)

  • The hotter than expected CPI data, which isn’t likely to persuade the Fed to cut rates as much as the market expects. The S&P 500 was rejected at 4,796.50, roughly its all-time high close (4,796.56). We saw volatile action in the Treasury market.
  • Dow -246.56 at 37449.17, Nasdaq -144.50 at 14825.15, S&P -38.21 at 4745.24
  • Only one of the S&P 500 sectors trades up while the rate-sensitive utilities (-2.4%) and real estate (-1.1%) sectors show the biggest losses. The energy sector (+0.4%) trades higher alongside WTI crude oil futures, which are up 3.2% to $73.66/bbl.
  • Broad based losses are weighing on value and growth stocks. The Russell 3000 Growth Index is down 0.8% and the Russell 3000 Value Index is down 1.0%.

Post-data selling found support once yields revisited their highs from Monday; Yields:

  • 2-yr: UNCH at 4.36%
  • 3-yr: -1 bp to 4.10%
  • 5-yr: UNCH at 3.98%
  • 10-yr: +1 bp to 4.04%
  • 30-yr: +3 bps to 4.23%

Shelter Costs Adding to Homeless

Shelter costs, the biggest services’ component and make up about a third of the overall CPI index.

Rent Inflation

Annual rent inflation in the United States eased to 6.2% in December 2023, the lowest since July 2022, from 6.5% in the previous month. Rent Inflation in the United States averaged 4.20 percent from 1954 until 2023, reaching an all-time high of 20.85 percent in June of 1980 and a record low of -0.73 percent in April of 2010

Housing Utilities

United States CPI Housing
US CPI Housing Utilities

Food Inflation Persistently High, But Falling

United States Food Inflation
US CPI Food inflation

Food inflation in the United States fell to 2.7% year-on-year in December 2023, the lowest since June 2021, easing from 2.9% in the prior month and a peak of 11.4% in August 2022. Prices continued to slow down for food at home (1.3% vs 1.7% in November) and food away from home (5.2% vs 5.3%). Monthly, food prices went up by 0.2% in December, the same pace as in November.

Transportation Inflation Persists

United States CPI Transportation
US CPI Transportation Inflation

The effects of the coronavirus pandemic, then the supply crisis and throw in the Russian invasion of Ukraine on top have weighed on prices. Since many businesses closed and lockdowns were imposed, denting economic activity leaving the world vulnerable.  A jump in commodities and material costs, coupled with supply constraints pushed producer prices up and some companies are passing those costs to clients.

“I’m making more money…But I don’t see it because I’m paying more money for stuff now.” Low-wage workers are getting sharp raises. Inflation is eating them up. via Greg Ip WSJ

 Source: BLS BLS

From the Traders Community News Desk