CPI Inflation Rate Slides, But Core Prices Are Sticky

The CPI inflation rate fell faster than expected in December. However, core inflation, which strips out food and energy, slowed in line with forecasts. S&P 500 futures rose moderately in early Thursday stock market action after release of the consumer price index.

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The CPI inflation rate eased to 6.5% from 7.1% the prior month vs. Wall Street expectations of 6.6%. The consumer price index was fell 0.1% on the month vs. the expected flat reading.

The core CPI rose 0.3% vs. November levels, as expected. The annual core inflation rate eased to 5.7% from 6%. The core CPI inflation rate peaked at a 40-year-high 6.6% in September.

The Fed is likely to continue stepping down the pace of rate hikes to just a quarter-point with its next policy move on Feb. 1. The extent to which the Fed keeps hiking after that will depend less on the CPI than wage growth, which is key to the outlook for service-sector inflation. The good news for markets that sparked the latest S&P 500 rally attempt is that wage growth showed a surprising deceleration in December.

Goods Vs. Services Spending

Inflation in goods prices, excluding food and energy, has decelerated from double-digit increases earlier in the year. That progress continued in December. Core goods prices fell 0.3% on the month. That brought year-over-year inflation to 2.1% from 3.7% in November.

Inflation in nonenergy services prices, which affects 56% of consumer budgets, still hasn’t begun to subside. Core services prices rose 0.5% on the month and 7% from a year ago vs. 6.8% in November. However, that’s partly due to the way the Labor Department calculates housing inflation. While new rates for rental housing have been falling for months, it takes about a year for that to be fully reflected in renewed leases and the CPI.

S&P 500 Reaction To CPI Report

S&P 500 futures climbed 0.4%, after first turning negative after release of the CPI report.

The latest S&P 500 rally off mid-October lows got another jolt of energy on Jan. 6, when unexpectedly tame wage inflation data raised hope that the Fed could wind down rate hikes before they crashed the economy.

The rally sparked by the jobs report has lifted the S&P 500 within 0.4% of its 200-day moving average. The past couple of rally attempts have faltered around that level, but this one might have some legs.

The S&P 500 finished 13.7% above its Oct. 13 bear-market intraday low on Wednesday, but remained 17.6% below its all-time closing high.

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CPI Inflation Report Details

Prices for used cars and trucks fell 2.5% on the month and are now 8.8% below year-ago levels. New vehicle prices were dipped 0.1% from November, while the annual price increase moderated to5.9% from 7.2% the prior month.

Energy prices fell 4.5% on the month, while the annual increase moderated to 7.3% from 13.1% in November.

Prices for food climbed 0.3% on the month, as the annual increase slowed to 10.4% from 10.6%.

Rent of one’s primary resident and owner’s equivalent rent rose 8.3% and 7.5% from a year ago, respectively. Both rose 0.8% on the month.

Prices for transportation rose 0.2% on the month and 14.6% from a year ago.

Medical services prices rose 0.1% on the month, after falling 0.7% and 0.6% the prior two months.

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