CPI Inflation Hits More in December, But There’s A Silver Lining

The Key Take-Aways

• Consumer Price Index increased by 2.9% from 2.7% in November.
• Inflation core rose by 3.2% on the whole, down from 3.3% a year ago.
• A cooler core inflation has revived the chance that the Federal Reserve could cut interest rates next year.

In December, the cost of living was higher than in November. Rising energy costs hurt budgets for households and increased inflation. However, "core" prices were cooler, providing some hope for lower inflation in the coming months. 

Consumer Price Index, which measures the cost-of-living, grew 2.9% in comparison to the previous year, from just 2.7%. Bureau of Labor Statistics reported Wednesday that the index reached its highest annual rate since July.

According to a survey of economists by Dow Jones Newswires and The Wall Street Journal, prices rose 0.4% monthly, slightly higher than the 0.3% consensus forecasters had expected. More than 40% of this increase was due to energy costs.

It’s cool to be inflation

Setting prices for food and gas aside, "core" prices rose more slowly, going up 0.2% over the month (3.2% over the year) after three consecutive months of 0.3% increases. This measure was below the median estimate of another 0.3% rise to 3.3% in annual growth. The core price is the most common way economists and policymakers gauge inflation, since gas and food prices fluctuate for reasons unrelated to longer-term trends.

A cooler core inflation rate not only helps households’ budgets but could also revive the hope for lower interest rates later in the year on credit cards or other loans. The Federal Reserve is widely expected to keep interest rates steady next time the Fed's policy committee meets in January after cutting rates at its last three meetings. However, the Fed could cut rates later in the year if core inflation continues to cool toward the central bank's goal of a 2% annual rate.

“After recent red-hot data, today’s softer than expected core CPI reading should help cool fears of a reacceleration in inflation," Tina Adatia, head of fixed income client portfolio management at Goldman Sachs Asset Management, wrote in a commentary. "While today’s release is likely insufficient to put a January rate cut back on the table, it strengthens the case that the Fed’s cutting cycle has not yet run its course."

As of Wednesday morning, financial markets were pricing in a 15% chance the Fed would not cut rates by the end of the year, down from 26% the day before according to the CME Group's FedWatch tool, which forecasts rate movements based on fed funds futures trading data.

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