CPI comes in as expected, core inflation eases to 5.7% in December

Khaosai Wongnatthakan

The Consumer Price Index slipped -0.1% in December, compared with +0.0% expected and +0.1% prior. Core CPI, which excludes food and energy, rose 0.3% during the month, in line with expectations and up from 0.2% in November.

Core goods CPI is "seeing rapid disinflation, while core services is taking longer to roll over (actually moved higher Y/Y in December)," Liz Ann Sonders, Charles Schwab chief investment strategist, said.

Prices for gasoline, airfares and used cars and trucks dropped during the last month of 2022, and were partly offset by higher prices for shelter, motor vehicle insurance, and apparel.

SA contributor Ahan Vashi sees the CPI report as progress, but the Fed can't declare victory yet. "While double-digit y/y inflation in food prices is still a concern, overall inflationary pressures are easing (at least for now). Today's CPI data shows progress in the Fed's fight against inflation; however, a tight labor market, i.e., low unemployment and strong wage growth, means the Fed will need to continue its rate hike cycle at its February meeting," he said.

"With disinflation now in the cards, the pace of rate hikes may be moderated down to 25 bps. The equity markets went into this report with a lot of optimism, and the recent rally in S&P 500 (SPX) may hit resistance at ~4,000 [the 200-DMA level]." Vashi added.

After the bell, all three U.S. stock averages are in the red. S&P 500 -0.8%, Nasdaq -1.1%, and Dow -0.5% in early trading. 10-year Treasury yield rises 1 basis point to 3.55%.

Recall that Federal Reserve Chair Jerome Powell had warned that services inflation, excluding housing, would be more persistent than other categories.

"This CPI report makes a downshift by the Fed to a 25 bps hike a little more likely, but far from a done deal, given such factors as core services ex-housing," said noted economist Mohamed El-Erian. Housing and apparel surprised a little on the upside, he added.

Gasoline was the biggest contributor to the M/M index decline, more than offsetting increases in the shelter indexes. The food index rose 0.3%, while the energy index dropped 4.5%.

Y/Y, CPI: +6.5% vs. +6.5% expected and +7.1% prior. The number represents the smallest increase since October 2021.

Y/Y, core CPI: +5.7% vs. +5.7% expected and +6.0% prior.

Michael Kramer of Mott Capital Management noted that services excluding shelter rose 7.4% Y/Y vs. +7.3% in November and service ex-medical increased 8% Y/Y vs. 7.6%. And while headline numbers "are going in the right direction, they are chiefly by falling energy and gasoline prices," he said. "Based on current market trends, energy and gasoline prices may be heading higher soon, making the continued decline in CPI uncertain."

Indexes that increased during the month include shelter (+0.8%), household furnishings and operations (+0.3%), motor vehicle insurance (+0.6%), recreation (+0.2%), and apparel (+0.5%), while the indexes for used cars and trucks (-2.5%) and airline fares (-3.1%) decreased.

Market participants, overall, see a higher chance of a 25-bp rate increase at the Fed's Jan. 31-Feb. 1 meeting, with a 87.2% probability, up from a 76.7% probability a day earlier. The chance of a 50-bp rate hike fell to 12.8% vs. 23.3% on Wednesday.

Earlier this week, a New York Fed survey showed that consumers lowered their inflation expectations for the year ahead.