Not There Yet

Those expecting a third consecutive downside surprise from consumer price growth in the US were disappointed on Thursday. December’s CPI report printed in line with estimates, largely consistent with the peak inflation narrative, but not the stuff rollicking rallies are made of.

In themselves, the as-expected figures constituted decent news, but markets were plainly hoping for an unequivocal excuse to storm higher. The numbers were a lot of things, some of them good, but I don’t think they were that.

The headline gauge fell 0.1% from November, while core prices rose 0.3% MoM. Both matched consensus.

It was the first “real” monthly decline on the headline index since inflation began to accelerate after the blast of deflation that accompanied the onset of the pandemic and associated lockdowns. The all items gauge logged a slight decline in July, but December’s print was the first drop that wasn’t imperceptible.

The energy gauge notched an outsized decline from November, and the 7.3% annual increase was the slowest since February of 2021.

Gas prices played a starring role in the report. The gasoline index dropped more than 9% from November, and fell 1.5% YoY.

Note that energy services prices rose 1.5% from the prior month, snapping a two-month streak of declines. Gauges for electricity and natural gas prices logged sizable monthly increases, and rose 14.3% and 19.3% on a 12-month basis, respectively.

Although monthly gains on the food gauges were comparatively modest, the 12-month increase in grocery prices remained squarely in double-digit territory, at nearly 12%. I should note that the food at home gauge’s 0.2% MoM increase was the smallest since March of 2021.

That’s good news, but I’d be remiss not to emphasize that Americans are still living with double-digit annual price growth for groceries and electricity. That’s exceedingly rare.

The elephant in the room is obviously shelter. On that front, the news was predictably bad.

The shelter gauge rose 0.8% from November, matching the largest monthly increase in decades, and underscoring the dramatic lagged effect of the pandemic property boom.

In fact, on an unrounded basis, December’s MoM increase was the largest since 1985. The annual rate of shelter inflation reached 7.5% in December, the hottest since 1982.

Both OER and the primary rents indexes posted very large monthly gains, and the annual prints continued to accelerate.

I’d gently note that if national home prices are any indication, there could be another peak in shelter inflation following a brief decline. Or not. We’ll see.

“Shelter remains strong, but with house prices having fallen through the second half of 2022 and rents now topping out nationally, that will slow rapidly from the second quarter of this year onwards,” ING’s James Knightley remarked.

Excluding energy, services prices rose 0.547% in December, quicker than November’s monthly pace, and still elevated versus the Great Moderation norm.

On a 12-month basis, services less energy rose more than 7%. That’s disconcerting, and I’d point readers (again) to the rather glaring connection between pay growth and services inflation.

The Fed watches ECI very closely, and Jerome Powell is now focused intently on core services inflation.

If you don’t like that chart (and some discerning readers may not), I suppose I’d express some mild frustration at the difficulty of staying apprised as to what we’re all supposed to exclude these days. When we discuss “core services inflation,” we’re apparently supposed to exclude pretty much everything that counts to everyday people. This perennial joke (i.e., that measures of core inflation strip out what regular people care about), is becoming a caricature of itself. It was already parody, now it’s just exhausting.

In that context, I’ll go ahead and note that core services prices excluding shelter rose 0.2%, and excluding rent they rose 0.25%. The latter was more than double November’s MoM pace. Still, used vehicle deflation continued for a sixth month, new car prices fell slightly from November, the medical care index blipped only marginally higher after the well-documented two-month drop and air fares fell more than 3%.

“The Fed has emphasized services ex-shelter given the importance of wage costs in what remains a tight jobs market. The story here looks fine,” Knightley went on to say. “As such, it looks as though housing is the main issue keeping core CPI [elevated] but that will soon change, so we believe there is enough here for the Fed to opt for a 25bps hike in February.”

The YoY prints on the headline and core aggregates were as expected, at 6.5% and 5.7%, respectively.

All in all, December’s report was consistent with the “peak inflation” narrative, but I’m not sure it was cause for any sort of celebratory price action. The monthly pace of core price growth needs to fall below 0.2% and stay there in order to put inflation on a sustainable path to the Fed’s target.

It’s (still) not obvious to me that services price growth is inclined to cooperate fully — it’ll probably have to be cajoled. And that means at least incrementally tighter monetary policy to slow demand and curtail wage growth.

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