The December CPI fell one tenth headline while up .3% core and both were exactly as anticipated. Versus last year, headline inflation rose 6.5% and the core rate was higher by 5.7% with both a slowdown from the 7.1% and 6% seen in November, respectively. The new focus we know now is the ex food/energy/shelter figure and that fell .1% m/o/m for a 3rd month and up 4.4% y/o/y. Energy prices fell 4.5% m/o/m, though still up 7.3% y/o/y. Food prices grew by .3% m/o/m and a still robust 10.4% y/o/y. I find it comical now though that everyone wants to ex out what they want to get to some real core rate of inflation they think is most relevant.
With respect to services, prices ex energy rose .5% m/o/m and 7% y/o/y with higher rents (lagging here as we know relative to reality) continuing to filter in. OER was up by .8% m/o/m and 7.5% y/o/y. Rent of Primary Residence was higher also by .8% m/o/m and by 8.3% y/o/y. Assume this is about 6 months behind what’s going on today when combining new leases and rollover of existing ones. Medical care prices rose .1% after two down 5 tenth prints (having a lot to do with the quirk around health insurance costs which saw another fall). Airline fares fell 3.1% in the month but still up 29% y/o/y. Hotel prices rose 1.7% m/o/m and up by 3.2% y/o/y. There is absolutely no easing in price pressures when it comes to a car. Fixing one cost 1% more in December from November and higher by 13% y/o/y. Car insurance prices jumped .6% m/o/m and by 14.2% y/o/y. It also remains expensive to eat out, with ‘food away from home’ seeing a .4% increase in price m/o/m and 8.3% y/o/y. Drinking too remains pricey. ‘Alcoholic beverages at home’ saw a .6% m/o/m price rise and 5.3% y/o/y. As for drinking away from home, prices rose .8% m/o/m and 6.8% y/o/y.
On the goods side, core goods prices fell again by .3% m/o/m and the y/o/y gain is now only 2.1%. Lower used car prices led the way with its 2.5% m/o/m drop, bringing the y/o/y decline to 8.8%. New car prices were little changed, down by .1% m/o/m but are still up 5.9% y/o/y. Household furnishings and supplies saw a .2% m/o/m gain and up by 7.3% y/o/y. Apparel prices grew by .5% m/o/m and 2.9% y/o/y.
Bottom line, the continued drop in goods prices is offsetting continued acceleration in service prices. The latter was up 7% y/o/y, the fastest since August 1982 while the core goods rate of change of 2.2% is the slowest since March 2021. For perspective, in the 20 yrs leading into Covid, services prices ex energy averaged 2.8% and core goods prices averaged zero. Thus, after the spike in inflation and now comedown, are we going back to that pre Covid trend immediately thereafter? I say no chance because of structurally higher wage differences globally, especially out of China, that will be unable to deliver goods as cheaply and the same can be said for services.
The fed funds futures market has fully taken out any chance the Fed hikes 50 bps in a few weeks. The 2 yr yield was 4.2% right before the number and is now at 4.13%. The 10 yr was 3.50% right ahead of the print and remains at that. The US dollar is getting smacked and gold is now above $1900. The Fed will hike in 25 bps in a few weeks as stated, maybe throw in one more but that will be it. Again though, higher for longer must dominate the discussion. Living with a sustainably higher cost of capital is MUCH MORE relevant now than the Fed stopping with its hikes because that itself is a continued source of tightening because of all the debt that will get continuously refinanced at a much higher rate. Throw in the importance of QT too.
Core CPI
Services ex Energy
Core Goods Prices