The 0.3% headline CPI for December matched the expected reading; this follows a 0.2% rate in November. The core rate also matched its expected reading at 0.2%, following an increase of 0.2% last month. On a 12-month rate-of-change basis, the seasonally adjusted headline and core rates are now 2.1% and 2.2% higher, respectively.
The CPI’s energy price index rose by 1.5% in December. If we exclude the effects of energy, the CPI would still have been 0.2% higher sequentially in December and was 1.8% higher than a year ago. The CPI excluding food prices would have been 0.3% month-to-month and was 2.5% higher year-over-year. Food prices were unchanged for a sixth consecutive month. Food and energy combined account for slightly more than 20% of the entire CPI. Among the major core components, the BLS reported that the index for shelter (which is 34% of the CPI) rose by 0.3%, and the indices for motor vehicle insurance rose by 0.8% in December. The medical care index rose by 0.2% following being unchanged in October and November. Any drag largely came again from apparel and communications.
It is once again worth noting that the “services less energy services” component of the CPI accounts for 59.8% of the entire index and is growing by 3.1% annually.
December’s increase in the core CPI was again largely driven by the main components of shelter, with a slightly slower pace of medical care price acceleration. Energy prices were again a key positive contributor at the headline level. With the economy closer to full employment, we are already starting to see some moderate increases in wage growth, even before any potential Trump stimulus might actually kick in. TIPS yield spreads have moved upward tangibly as a result of the recent changes in Washington, but the recent pullback in bond yields suggests that further gains should be more limited until we at least get some additional clarity on both actual policy changes and, importantly, the offsets in terms of spending cuts. The degree of overshoot the Fed will tolerate, meanwhile, also remains an open question. Janet Yellen recently ‘clarified’ her comments with respect to just how hot she would allow the economy to run, tempering any belief that she would tolerate a very larger overshooting of the inflation target. As it stands, the Fed has given guidance toward 3 rate increases this year, the market expects just 2, the end-result will very much depend on what happens in Washington.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.