As markets expected, the Consumer Price Index (CPI) rose 0.4% month-on-month (m/m) in December, after rising 0.3% m/m in November. On a twelve-month basis, CPI ticked up to 2.9% (from 2.7% in November).
Over 40% of the headline inflation increase was due to a 2.6% m/m increase in energy prices. Even with that big increase in December, energy prices remain 0.5% below their year ago levels.
Core CPI was slightly softer than expected in December. Excluding food and energy, CPI rose 0.2% m/m after four consecutive 0.3% m/m gains. The twelve-month change edged down a tick to 3.2%.
Core goods prices rose a more modest 0.1% m/m, after a 0.3% gain in November. Prices for new and used vehicles are still exerting upward pressure, but to a lesser extent than in November.
Core services were up 0.3% m/m, matching November’s pace. On a year-ago basis, services prices were up 4.4%, down two tenths from the prior month. Shelter prices rose 0.3% m/m in December, with matching 0.3% increases for both rent and owners’ equivalent rent. Shelter inflation is 4.6% on a year-on-year basis, continuing to make steady downward progress from its 2023 highs.
Key Implications
December’s CPI report contained a little bit of good news on core inflation. After a few months of hotter readings, core prices posted a softer-than-expected gain. Fed members have indicated a desire for a more gradual pace of interest rate cuts this year, and we still think they will take a pause in January. Last Friday’s healthy payrolls report provided little reason for the Fed to cut rates quickly. But we expect that a March cut remains on the table, with today’s CPI providing reassurance that inflation data surprises are not all in one direction.
One challenge for inflation watchers is that the CPI is not the Fed’s preferred inflation measure. That is the core PCE deflator, which did not follow the CPI’s lead in November. The 3-month annualized change remained more benign at 2.5%, and still points to downward momentum on the year-on-year measure. The Fed will not get this number before their Jan. 29th decision date. Next week will also bring a deluge of policy shifts from the incoming Trump administration, giving the Fed plenty to think about as it heads into its deliberations.
