Inflation Ticked Back Up in December

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Higher Inflation

Consumer price inflation unexpectedly accelerated in December, rising 0.3% on the month, and 3.4% year-over-year, the Bureau of Labor Statistics reported Thursday. Is this throwing a wrench into market hopes for swift interest rate cuts by the Federal Reserve this year?

Core inflation, which strips out food and energy prices, also rose 0.3%.

Inflation has largely moderated in the past months, leading the market to expect that the Fed’s work of combating price hikes with higher interest rates was largely done. But the December CPI data marked the fastest increase in three months and paints a very different picture.

The Detail and the Big Picture

This increase in December inflation was fueled by higher costs for housing and cars. The shelter index rose 6.2% year-over-year and was the biggest contributing factor to last month’s inflation bump.

That said, inflation has come down meaningfully over the past year. In December 2022, the year-over-year rate sat at 6.5%, nearly double the present rate. Other economic indicators, including those in the labor market, continued to show signs of strength, spurring hopes for a soft landing – the achievement of lowering inflation without tipping the economy into a recession.

What Happens Next?

We don’t have a crystal ball, but it seems that Thursday’s inflation data complicated the case for what the Fed might do next.In the latest round of economic projections published in December, Fed officials hooded towards multiple rate cuts in 2024. The first rate reduction is expected for March, according to the CME FedWatch Tool. December’s bump in the disinflation road may not be enough to change that, after all, one data point doesn’t make a trend. But there’s still plenty of economic data coming between this week and the March Fed meeting, and the market will be watching all of it closely.

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