CPI inflation rate in December fell faster than expected. However, core inflation, which excludes food and energy, is only expected to slow down as expected amid continued service inflation. S&P 500 falls moderately early Thursday stock market actionafter initially oscillating between small losses and gains after the release of the consumer price index.
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The CPI inflation rate fell to 6.5% from 7.1% the previous month versus Wall Street expectations of 6.6%. The consumer price index fell 0.1% on the month compared with expectations unchanged.
Core CPI rose 0.3% from November levels, as expected. The annual core inflation rate fell to 5.7% from 6%. Core CPI inflation peaked at a 40-year high of 6.6% in September.
The Fed is likely to continue to reduce the rate of interest rate hikes to only a quarter of a point with the next policy move on February 1. The Fed is likely to raise rates by only 25 basis points. skyrocketed to 93% after CPI, up from 77%.
The extent to which the Fed continues to raise rates thereafter will depend less on CPI than on wage growth, which is key to the outlook for service-sector inflation. The good news for the markets that sparked the S&P 500’s most recent recovery attempt is that wage growth showed a surprising deceleration in December.
Commodities Vs. Service spending
Commodity price inflation, which excludes food and energy, has decelerated from double-digit gains at the start of the year. That progress continued into December. Core commodity prices fell 0.3% for the month. That brought annual inflation to 2.1% from 3.7% in November.
Non-energy service price inflation, which affects 56% of consumer budgets, has not yet begun to ease. Prices for core services rose 0.5% on the month and 7% from a year ago compared with 6.8% in November. However, that is partly due to the way the Labor Department calculates housing inflation. While new rental prices have been falling for months, it took about a year for that to be fully reflected in new leases and CPI.
However, the price of services excluding shelters rose 7.4% from a year ago. That includes the price of energy services, up 15.6% from a year ago. Excluding energy and accommodation, service prices are up about 6.8% from a year ago.
S&P 500 Reaction to CPI . Report
The S&P 500 lost 0.6% shortly after the opening bell. The Dow Jones Industrial Average fell 0.4%, while the Nasdaq composite fell 0.8%.
The S&P 500’s most recent rally from mid-October lows received another burst of energy on Jan. 6, as unexpected wage inflation data came under control sparking hopes that the Fed could rate hikes before they crash the economy.
The rally fueled by the jobs report lifted the S&P 500 0.4 percent above its 200-day moving average. A few previous recovery attempts have stalled around that level, but this time there could be some leg up.
The S&P 500 finished 13.7% above the October 13 bear market low on Wednesday, but still 17.6% below its all-time high close.
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CPI Inflation Report Details
Used car and truck prices have fallen 2.5% for the month and are now 8.8% lower than the previous year. New car prices fell 0.1% from November, while year-over-year price gains fell to 5.9% from 7.2% the previous month.
Energy prices fell 4.5% on the month, while the annual gain was moderate from 13.1% in November to 7.3%.
Food prices rose 0.3% on the month, as year-over-year growth slowed from 10.6% to 10.4%.
A prime resident’s rent and owner’s equivalent rent rose 8.3% and 7.5%, respectively, from a year ago. Both are up 0.8% for the month.
Transportation service prices rose 0.2 percent on the month and 14.6% higher than a year ago.
Prices for medical services rose 0.1% on the month, after falling 0.7% and 0.6% in the previous two months. That leaves the year-on-year gain at 4.1%.
Fed’s Powell shifts focus from CPI to wages
A continued decline in CPI inflation may allow the S&P 500 to continue moving higher, but it will not be a catalyst.
Wage growth has become key to the Fed’s policy outlook, so investors celebrated after December employment report showed a sudden drop in Q4. Average hourly wages rose 4.6% from a year ago, below expectations of 5%, kicking off the current S&P 500 rally. Wage growth has now slowed to its lowest level since August 2021, slipping by a full percentage point from March’s peak.
With an annualized wage growth rate of 4% in Q4, the pace of wage growth appears to be falling closer to Fed Chairman Jerome Powell’s 3.5% target. Factoring in productivity growth of around 1.5%, wage growth of 3.5% could bring inflation close to matching the Fed’s 2% target.
The most important future inflation rate is personal consumption expenditure (PCE) services excluding energy and housing, Powell said. Core commodity price inflation is easing, and the same could be said for housing inflation in 2023, as market rents stagnate. But inflation in non-energy services, which does not include housing, is likely to continue to rise as long as wage growth remains hot.
Housing accounts for more than 30% of the CPI and 40% of the base CPI, but it accounts for only 15% of the broader PCE basket.
Health care spending in the CPI does not include most spending: spending by employers and government programs. Furthermore, the recent decline in health service prices in the CPI reflects older data on insurer profits. In contrast, PCE healthcare service inflation is increasing amid higher labor costs. In addition, food consumed at restaurants, which continues to see high inflation, is excluded from the core CPI but grouped into core PCE services.
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