US: Core Inflation Inches Down to 3.9% in December 

The Consumer Price Index (CPI) rose 0.3% month-on-month (m/m) in December, ahead of the consensus forecast calling for a more modest gain of 0.1% m/m. CPI rose 3.4% on a year-over-year basis – up from 3.1% in November.

• After having declined in each of the two months prior, energy prices inched higher by 0.4% m/m in December, due to in uptick in electricity costs (1.3% m/m) and slightly higher prices at the pump (+0.2% m/m). Food prices matched last month’s gain of 0.2% m/m, pushing the 12-month change down to 2.7%.

Excluding food & energy, core prices rose 0.3% m/m, in line with the consensus forecast. The twelve-month change fell 0.1 percentage points to 3.9% – the slowest pace of growth since May 2021 – while the three-month annualized rate of change dipped to a softer 3.3%.

Core service prices rose 0.4% m/m – a modest deceleration from November’s 0.5% gain. Shelter costs were up a ‘soft’ 0.5% m/m – unchanged from November – as rent of primary residence (+0.4% m/m) and owners’ equivalent rent (+0.5% m/m) both notched sizeable gains. Non-housing services decelerated on a monthly basis, but still grew by a relatively strong 0.4%, while the 12-month change continues to hover at an elevated 3.9%.

Goods prices were flat in December, snapping six consecutive months of declines.

Key Implications

No huge surprises in the December CPI report. While the monthly gain on headline inflation came in a touch above expectations, the more important core measure was bang-on consensus. Importantly, both the three-and-six-month annualized rates of change (at 3.3% and 3.2%, respectively) on core sit well below the twelve-month change, suggesting a further deceleration in the months ahead.

Today’s inflation report is unlikely to alter the FOMC’s near-term policy stance. Although considerable progress on the inflation front has been made over the past year, imbalances in the labor market remain and if left unchecked, threaten to stall the disinflationary process. As a result, Fed officials will likely need to see more compelling evidence that the labor market is cooling, and that inflation remains on a sustained downward path towards 2% before pulling the trigger on rate cuts. This is unlikely to happen until mid-year.