Core CPI, which excludes food and energy prices, increased 0.3%. The data was in line with consensus forecasts.
Consumer spending is continuing to shift away from goods, and many supply-side bottlenecks have eased, reducing inflationary pressure. Core goods prices fell for the third month in a row, helped by big declines in used auto prices, which were down another 2.5% in December. By contrast, core service prices are still rising, driven mostly by shelter, which increased by 0.8%. However, it is important to keep in mind that shelter prices are a lagging indicator. Timely data on new leases shows rent growth slowing or even turning negative in some cities. Core CPI excluding shelter has fallen by 0.1% in each of the last three months.
In our view, the recent inflation data is good enough for the Federal Reserve to consider pausing the rate hiking cycle. Despite this, we expect another rate hike at the FOMC meeting on 1 February. The reason is that the labor market remains very tight, keeping upward pressure on wages. Until there is some sign of softening, it will be difficult for the Fed to feel confident that it will sustainably hit its 2% inflation target. However, the more favorable inflation prints should allow the Fed to hike by 25 basis points rather than the more aggressive hikes it has been using up until now.
Main contributors - Brian Rose
Content is a product of the Chief Investment Office (CIO).
Original report - Inflation good enough for Fed, 12 January 2023.
