Consumer prices increased 0.3% year-on-year in December, exceeding expectations and increasing faster than predicted, according to the Labor Department. This monthly increase can primarily be attributed to housing costs.
A separate measure that excludes volatile food and energy prices increased 0.2% year-over-year – surpassing the Fed’s target rate by more than two percentage points.
Food Prices
Food prices were on an upward trend last month as higher gasoline and grocery store costs offset lower meat, fruit and vegetable costs. At home prices increased 0.1 percent while those away from home rose 0.2 percent; additionally, the core consumer price index which strips out volatile energy costs also saw an increase of 0.3 percent; matching estimates.
Annual inflation held steady at 3.4%, matching forecasts and the lowest level since May 2021. Since hitting its 40-year peak in September 2022, inflation pressures had been declining; however, recent resurgent energy and shelter price fluctuations threaten the Federal Reserve’s goals of controlling inflation; it needs more evidence that inflation levels are stabilising before making any decisions on when or if to cut rates; hence this latest CPI data gives them even more reasons not to act quickly.
Energy Prices
Rising energy prices were one of the primary drivers of inflation last month. According to Thursday’s Labor Department report, wholesale gas and electricity costs increased year-over-year at 3.4% — far exceeding economists’ predictions.
Weather events often play a large part in shaping gas and electricity prices. They can interrupt supplies or drive up demand; for example, in Texas in 2021 a winter storm caused widespread power outages that resulted in thousands of homeowners being charged thousands for service not provided for days; Hurricane Ida resulted in suspension of oil production in the Gulf of Mexico which lead to higher oil prices overall.
Domestic energy supplies may be threatened by global calamities, but Congress and the Biden Administration can still take steps to ease barriers for producers and ensure policies don’t undermine our production capacity. Doing this would help lower energy prices; utilities typically pass along most of their expenses to their consumers through higher bills for electricity service.
Shelter Prices
Even with recent moderation, shelter prices rose again – accounting for almost all of the monthly all-items increase. That shouldn’t come as any great shock as housing costs are often one of the more volatile components of CPI.
Core inflation, excluding food and energy prices, also increased 0.3% last month – slightly more than forecast but still well under what the Federal Reserve had hoped to see.
Overall, this report suggests that an inflation rebound may not be as immediate as anticipated by market participants; giving pause for thought before cutting interest rates again as soon as next month.
Futures pricing on the fed funds rate suggests investors are unfazed by today’s report when it comes to expectations for a rate cut this March. With unemployment having decreased to 3.7% since 2011, some pressure has been taken off of potential Fed rate cuts; but, according to Moody’s Analytics chief economist Mark Zandi, improvements haven’t translated fully into household spending patterns despite improved inflation trends yet fully materializing into household spending patterns.
Other Prices
After two years of rapid inflation that saw prices for everything from bread to ground beef rise rapidly, consumers are finally witnessing some meaningful slowing of inflationary pressures. Yet recent data on both overall consumer price indexes as well as core consumer prices that exclude volatile foods and energy costs still indicate inflation levels above the Federal Reserve’s target of 2%.
Thursday’s Consumer Price Index report indicated that overall consumer prices increased 0.3% year-on-year in December – slightly more than what economists had projected – while core CPI rose 0.3% as per estimates.
Overall and core indexes increased from November, with shelter costs driving much of this acceleration. Motor-vehicle insurance costs also rose sharply while rent and monthly homeowner payments continued their climb. Meanwhile, inflation eased off slightly – dropping to 3.4% annually from 4.1%; an encouraging sign that inflation may be being reined in further; analysts caution that high rents could still contribute to year-on-year price gains.
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