Inflation eased in December but remained significantly above the Federal Reserve’s 2% target, according to the latest consumer price index (CPI) data released on Thursday. The report shows some progress in the fight against high inflation but suggests the central bank still has work to do in getting prices under control.
Inflation Drops to 6.5% Annually
The CPI rose 0.1% in December, down from a 0.2% increase in November, the Labor Department said. Over the last 12 months, prices climbed 6.5%, down from 7.1% annual inflation in November and a recent peak of 9.1% in June.
This marks the sixth straight month that annual inflation has cooled. While a move in the right direction, it remains well above levels seen before the pandemic.
Annual Inflation Rates
| Month | Inflation Rate |
| ------------- |:-------------:|
| June 2022 | 9.1% |
| November 2022 | 7.1% |
| December 2022 | 6.5% |
The decline was driven by a sharp drop in gas prices, though increases in food, shelter, and healthcare costs offset some of those savings.
“Inflation is still running very hot even as gasoline prices continue to drop,” said Sal Guatieri, senior economist at BMO Capital Markets. “The Fed has more work to do.”
Fed Remains Laser-Focused on Inflation
The Federal Reserve has been aggressively raising interest rates to cool demand and bring prices under control. It lifted its benchmark rate by 50 basis points last month to a range of 4.25% to 4.5%, its highest level since late 2007.
The latest inflation data is in line with expectations and unlikely to drastically shift Fed policy in the near-term. Central bank officials have signaled they intend to raise rates past 5% this year with quarter-point hikes at the next couple meetings.
“This will keep the Fed vigilant in fighting high inflation through more rate hikes that restrict demand,” noted Rubeela Farooqi, chief U.S. economist at High Frequency Economics.
Markets expect rates to peak around 5.1% in the coming months before the Fed stops tightening and eventually cuts later this year as inflation continues to ease.
Ongoing Price Pressures in Key Areas
While the headline inflation number is moving the right way, the report shows some stubborn spots that continue putting upward pressure on prices. Here are a few key details:
Housing
- Shelter costs, which account for about one-third of the CPI, rose 0.8% in December. That’s up from 0.7% in November.
- On an annual basis, shelter inflation hit 7.5% – the highest since 1982.
- Rising rents and housing prices have been a major contributor to inflation.
Food
- Grocery prices jumped 0.3% last month, accelerating from November.
- Food inflation rose 10.4% over the past year, the fastest pace since 1980.
- Soaring egg prices, up nearly 60% annually amid supply shortages, contributed to higher food costs.
Healthcare
- Healthcare inflation picked up 0.1% sequentially and 5.5% annually.
- Medical care services rose 0.2% for the month.
Core inflation
- The core CPI, which excludes volatile food and energy prices, edged up 0.3% in December – hotter than expected.
- That brings the annual core rate to 5.7%, down just a tick from November.
- The Fed pays close attention to this underlying inflation gauge in determining policy. So the still-high and slightly hotter reading suggests they’ll remain aggressive tightening this year.
“Today’s inflation data paints a picture of an economy that is experiencing sticker price shocks from high shelter, food, and healthcare costs,” said Mahir Rasheed, U.S. economist at Oxford Economics.
While goods disinflation is underway, he added, services inflation continues to be “unnervingly persistent.”
Market Reaction Muted as Focus Turns to Earnings
Stocks opened slightly lower following the report but quickly rebounded. The Dow Jones Industrial Average rose 0.2%, recovering from a drop just after the data. The S&P 500 dipped 0.1% while the tech-heavy Nasdaq Composite edged up 0.2%.
“Overall takeaway – inflation is headed in the right direction but the market seems to be looking ahead to earnings season,” noted Jeff Buchbinder, equity strategist for LPL Financial.
Major banks kicked off fourth-quarter results this week, helping mark the unofficial start of earnings season. Investors are looking for signs of resilience in corporate profits as higher rates and uncertainties over the economic outlook raised worries of a potential recession this year.
Initial results have been mixed so far. JPMorgan Chase and Bank of America posted better-than-expected profits Friday but noted that consumers are spending cautiously amid inflation concerns.
Fourth-quarter earnings for S&P 500 companies are projected to decline nearly 5%, according to Refinitiv. That would mark the first back-to-back quarterly profit drop since 2020.
With the CPI report mostly as anticipated, attention now turns back to corporate earnings which could drive more volatility in the next few weeks.
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