cemagraphics
By Joseph Purtell
The easing of price gains continues but may slow in coming months.
This week’s U.S. Consumer Price Index (CPI) reading was in line with consensus expectations for December, with headline CPI decreasing 0.1% month over month (MoM) and increasing 6.5% year over year (YoY). Core inflation rose 0.3% MoM and 5.7% YoY. In the non-core categories, the headline number was dragged lower by its energy commodities component, which fell 9.4% MoM, while food inflation rose 0.3% MoM. Within the core components, goods were lower by 0.34% MoM while services increased 0.55% MoM.
Looking deeper, we note that the rapid deceleration observed in core over the past three months—a decline from nearly 6% to 3% on a three-month annualized basis—is unlikely to continue, while we see several indications that the 0.3% MoM rate could be the norm over the next six months. First, core goods have been running at negative 5% annualized inflation over the past three months, a rate of deflation that reflects a give-back from large increases experienced over the past 18 months, and likely an unsustainable trend moving forward. Second, shelter inflation continues to hover around its near-term highs; despite a widely anticipated upcoming drop, we project it will continue to run above a 5% annualized rate through the end of the first quarter. Finally, the closely watched core services ex-shelter inflation component halted its recent declines and looks poised to move slightly higher over the next few months on a tight labor market and strong (yet moderating) wage pressures.
That said, we believe peak inflation is behind us, and our projections for inflation over the course of 2023 and 2024 changed little upon the release of December CPI. Indeed, we project headline and core inflation to end 2023 at 3.1% and 3.5%, respectively, which, while above the Fed’s 2% target, reflect a broad deceleration versus the 2022 average. By year-end 2024, we project that both headline and core inflation will be near the 2% target.
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