Consumer prices were up a solid 0.5% month-on-month (m/m) in December, slightly slower than November’s 0.8% jump, but a tenth higher than markets were expecting. That took the year-on-year (y/y) pace of inflation to 7% – the fastest pace since 1982.
In a key shift, energy prices fell in December (-0.4% m/m), but remained up 29.3% versus a year ago. Food prices continued to rise at a solid clip, up 0.5% m/m, and are up 6.3% y/y.
Core inflation (ex. food and energy) was hotter than expected, jumping up 0.6% m/m. As a result, the year-on-year rate of core inflation picked up to 5.5%, from 4.9% in November, and the fastest pace in over 30 years.
The biggest drivers of core inflation were shelter (+0.4% m/m) and used vehicle prices (+3.5% m/m). The heavy hitters within shelter – rent and owners’ equivalent rent – both rose 0.4% m/m, matching November’s pace. Prices were up strongly for other categories too, including household furnishings and operations (+1.1% m/m), apparel (+1.7% m/m), new vehicles (+1.0% m/m).
Overall within core inflation, goods prices contributed the most to the upside surprise in core inflation (+1.2% m/m). Core services were up 0.3% m/m, cooling from October and November.
You had to look hard to find price declines in November’s data. Car insurance was down again (-1.5% m/m), and recreation was down 0.2% m/m again.
Key Implications
Buckle up. After reaching new highs, core inflation is likely to get even higher in the first quarter of 2022 on a year-on-year basis as price levels are compared to relative weakness in early 2021. Inflation’s persistently high readings have caught the attention of the Federal Reserve, which accelerated winding down its extraordinary stimulus measures in December. As outlined in our latest forecast, we expect rate hikes are not very far behind.
We also expect price pressures to ease somewhat this year from their current high levels, but to remain above the Fed’s comfort zone long enough to lead to multiple rate hikes over the course of the year.
