The December CPI report had been overblown, like everything it seems these days. The headline numbers were as expected. The Consumer Price Index declined 0.1% m/m (consensus 0.0%), with a 9.4% m/m decline in the gasoline index, while core CPI, increased 0.3% m/m as expected. On a year-over-year basis, CPI was 6.5% from 7.1% in November. Core CPI was up 5.7% versus 6.0% in November. CPI was lower for a sixth straight month to the lowest since October 2021.
However, services inflation, which the Fed has been commenting on did not improve. On a year-over-year basis, services inflation was up 7.5% versus 7.2% in November. Excluding rent of shelter, services inflation increased 7.4% year-over-year versus 7.3% in November. Excluding medical care services, services inflation was up 8.0% year-over-year versus 7.6% in November.
A reminder we are coming off June’s 9.1% inflation rate which was the highest in four decades. CPI has moderated after resurging in August with aggressive Fed interest rate rises.
US December 2022 Highlights
CPI
- US CPI M/M Dec: -0.1% (exp -0.1%; Prev 0.1%)
- US CPI Y/Y Dec: 6.5% (exp 6.5%; Prev 7.1%)
- The food index was up 0.3% month-over-month and up 10.4% year-over-year.
- The energy index was down 4.5% month-over-month and up 7.3% year-over-year.
- The used cars and trucks index was down 2.5% month-over-month and down 8.8% year-over-year.
- The shelter index, driven by a 0.8% increase in the rent index and a 0.8% increase in the owners’ equivalent rent index, was up 0.8% month-over-month and up 7.5% year-over-year.
Services Inflation Still Rising
- Services inflation was up 7.5% y/y versus 7.2% in November.
- Excluding rent of shelter, services inflation increased 7.4% year-over-year versus 7.3% in November.
- Excluding medical care services, services inflation was up 8.0% year-over-year versus 7.6% in November.
But there is hope..
Core inflation:
- US CPI Ex Food And Energy (M/M) Dec: 0.3% (exp 0.3%; prev 0.2%)
- US CPI Ex Food And Energy (Y/Y) Dec: 5.7% (exp 5.7%; prev 6.0%)
Real Earnings
- US Real Average Hourly Earnings (Y/Y) Dec: -1.7% (R prev -2.1%)
- US Real Average Weekly Earnings (Y/Y) Dec: -3.1% (R prev -3.3%)
The Fed is likely to want evidence of an inflation slowdown, another 0.50-point rate rise could be on the table at the next meeting as rises “depend on the data we get between now and then.”
Market Reaction (updated at 10:00 AM ET)
After the data official release stocks flew higher as yields and the US dollar fell after further deceleration in inflation, not as big as the previous month but sizeable. Then it all turned around as services inflation became apparent to the market callers. The moves are exaggerated by derivative flow to cover deltas pre option market open. A quick collapse from there and a bounce into the US market open as the chart below shows.
- Dow 33978.25 +5.31 (0.02%)
- Nasdaq 10937.27 +5.68 (0.05%)
- SP 500 4086.15 +116.54 (2.94%)
- Strong: Energy, Financials, Communication Services, Information Technology
- Weak: Health Care, Consumer Discretionary, Consumer Staples, Utilities
- The US dollar fell after the CPI report. EUR/USD rose to 1.0832 but recovered back to 1.0780.
- AUDUSD moved up to a 5-month high of 0.69836.
U.S. Treasuries sit on their highs after jumping in reaction. The 10-yr note and the 30-yr bond trade a bit below their post-data highs at this juncture while shorter tenors are building on their gains. Equities are on track for a firmly higher start with futures on the S&P 500 up nearly 3.0%.
- Yields:
- 2-yr: -7 bps to 4.15%
- 3-yr: -9 bps to 3.82%
- 5-yr: -8 bps to 3.59%
- 10-yr: -4 bps to 3.51%
- 30-yr: -2 bps to 3.66%
In forex the USD is sharply lower with risk on flows on the back of the higher stocks, lower yields, lower dollar. The AUDUSD rose around 1.87% at .68.59. The JPY rose around 2.0% in volatile trading at 134.88
Monthly Price Increases
- Energy cost increased 7.3%, well below 13.1% in Novembe
- Gasoline cost dropped 1.5%, following a 10.1% surge in November.
- Fuel oil cost slowed (41.5% vs 65.7%)
- Electricity prices rose slightly faster (14.3% vs 13.7%).
- A slowdown was also seen in food prices (10.4% vs 10.6%)
- Cost of used cars and trucks continued to decline (-8.8% vs -3.3%).
- On the other hand, the cost of shelter increased faster (7.5% vs 7.1%).
Outright deflation for used cars & trucks p You have to go back to 1960 to see a 3-month annualized % change in CPI used car & truck component this negative (-27.5%) @LizAnnSonders
Yearly Price Increases
- Energy cost increased 13.1%, below 17.6% in October, due to gasoline (10.1% vs 17.5%), fuel oil (65.7% vs 68.5%), and electricity (13.7% vs 14.1%).
- Slowdown was also seen in food prices (10.6% vs 10.9%) while prices of used cars and trucks declined by 3.3% (after a 2% rise in October).
- On the other hand, the cost of shelter increased faster (7.1% vs 6.9%).
Shelter Costs Adding to Homeless
Shelter component of CPI had largest m/m increase since August 1990
Shelter costs, the biggest services’ component and make up about a third of the overall CPI index. Rent of shelter was up the most on record on an annual basis last month, as was owners’ equivalent rent. Rent Inflation in the United States increased to 7.10 percent in November from 6.90 percent in October of 2022
What is unnerving the housing components of the report have a lag between real-time changes in rents and home prices and when those are reflected in Labor Department data.
Rent Inflation
Housing Utilities
Many analysts had expected back in March 2022, clearly, they have been mistaken to mark the inflation peak although the war in Ukraine is far from over, supply chain bottlenecks persist, and consumer demand remains elevated which is likely to weigh on the CPI.
The hope was the slowdown back in April was a sign that inflation had probably peaked, the inflation is unlikely to fall to pre-pandemic levels any time soon and will remain above the Fed’s 2% target for a long time as supply disruptions persist and energy and food prices remain elevated.
Food Inflation Persistently High
Cost of food in the United States increased at a slower 10.4% from a year earlier in December of 2022, decelerating from a 10.6% rise in November and a peak of 11.4% in August. It was the lowest reading since June of 2022, as prices slowed down further for both food at home (11.8% vs 12% in November) and food away from home (8.3% vs 8.5%).
Transportation Inflation Persists
The effects of the coronavirus pandemic, then the supply crisis and throw in the Russian invasion of Ukraine on top have been weighing on prices. Since last year 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
From the Traders Community News Desk