December Consumer Prices Rise 0.3%, Exceeding Expectations and Pushing Annual Rate to 3.4%

Consumer prices experienced a higher-than-expected increase in December, indicating that inflation continues to impact the U.S. economy, as reported by a Labor Department measure on Thursday.

The Consumer Price Index (CPI) showed a 0.3% increase for the month, surpassing the estimated 0.2% at a time when many economists and policymakers anticipated a moderation in inflationary pressures. The year-end CPI for 2023 closed with a 3.4% rise, slightly exceeding the Dow Jones survey’s year-over-year projection of 3.2%. In comparison, the annual CPI gain in December 2022 was approximately 6.4%.

The core CPI, which excludes volatile food and energy prices, also increased by 0.3% for the month and 3.9% from a year ago. The year-over-year core reading marked the lowest since May 2021. A significant portion of this increase was attributed to rising shelter costs, which climbed 0.5% for the month and accounted for more than half of the core CPI increase. On an annual basis, shelter costs rose by 6.2%.

Food prices increased by 0.2% in December, mirroring November’s figure. Notably, egg prices surged by 8.9% for the month but remained 23.8% lower annually. Energy prices posted a 0.4% gain, reversing a 2.3% decline in November. Airline fares increased by 1% for the month.

In key price indexes, motor vehicle insurance increased by 1.5%, medical care accelerated by 0.6%, and used vehicle prices, a significant contributor to the initial inflation surge, rose by 0.5% following a 1.6% increase in November.

Wages adjusted for inflation posted a 0.2% gain for the month and rose modestly by 0.8% from a year ago, according to the Bureau of Labor Statistics.

Federal Reserve officials are closely monitoring services prices to gauge whether inflation is displaying durable signs of returning to the central bank’s 2% target. Services less energy increased by 0.4% for the month and 5.3% from a year ago.

Despite the higher-than-expected inflation readings, there is still a strong possibility that the Fed may start cutting interest rates in March, as indicated by futures traders. The CME Group’s FedWatch gauge of futures pricing suggests a 69% probability of a March reduction. However, there is a disparity between market expectations of six rate cuts this year and the Fed’s projections of three.

While the numbers indicate progress, some experts note that disinflation progress is slow and may not be a straightforward path to reaching the 2% target. Resilient economic indicators, such as low unemployment and continued consumer spending, suggest that the Fed may maintain its current policy stance for some time.

In other economic news on Thursday, the Labor Department reported that initial jobless claims remained little changed at 202,000, below the Dow Jones estimate of 210,000.

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