Highlights:

  • The all items CPI declined an expected 0.1% in the month following no change in November. Declining energy prices over the past two months have put downward pressure on overall consumer inflation.
  • Food prices rose a more robust 0.4% with core prices up 0.2% for the third consecutive month.
  • The CPI annual rate dropped to slightly below the Fed’s 2% inflation objective at 1.9% though the core measure remained slightly above this mark at 2.2%.

Our Take:

December consumer prices dropped 0.1% in the month. The decline had been widely expected given earlier indications that weakening oil prices were putting attendant downward pressure on gasoline prices. Outside of energy prices, food prices rose 0.4% after a 0.2% gain in November while core, or ex food and energy, prices rose 0.2% for the third consecutive month. The weakness in energy prices has put the annual increase in overall consumer prices at a slightly ‘below objective’ 1.9% with the core measure is showing greater price pressure rising 2.2%. The headline year-over-year rate has been relatively volatile over the past couple of years largely reflecting the swings in energy prices. In contrast. the annual increase in core inflation has been steadily rising from a recent low of 1.7% recorded November 2017 to the current rate slightly above the Fed’s 2.0% objective. This upward trend matches a similar steady rise in wage gains increasing 3.2% in December up from the 2.7% recorded the year prior. Though the current rate of increase in both measures is not worrisome, it is the upward trajectory that needs to be watched given that the economy is operating beyond capacity. Activity is expected to slow going forward as fiscal stimulus starts to wane and earlier Fed tightening kicks in which should help to limit the upward trajectory in prices going forward. But the current fed funds range of 2.25% to 2.50% still implies modestly stimulative conditions. Our expectation is that policy will be tightened modestly further to eliminate this remaining stimulus with the fed funds range eventually rising to 2.75% to 3.00% later this year.

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