USA December CPI neither a Gift nor Coal

In my personal experience, the final CPI report of 2023 didn't throw me any curveballs. 0.3% rise in the headline CPI in December, slightly surpassing what most of the market were expecting. This increase was mainly driven by a slightly stronger growth in energy prices during the month. Core CPI also saw a 0.3% uptick, aligning with the consensus forecast. In December, core goods prices stayed put, and when looking at a year-over-year basis, inflation in this category isn't much different from its pre-COVID trend. On the flip side, core services inflation has been somewhat stubborn, with shelter prices easing slowly and travel-related prices bouncing back a bit.

Even though the headline CPI jumped to 3.4% year-over-year in December, the overall trend in the inflation is on a downward slope. At 3.9%, the core CPI on a year-over-year basis is below 4% for the first time in two and a half years. Furthermore, the three-month annualized rate of 3.3% suggests that there might be more slowing down in the future.

Based on my observations, I predict that inflation will continue to decelerate throughout 2024, thanks to improved supply dynamics and weaker demand from consumers. However, progress is expected to be a bit sluggish this year, leaving policymakers somewhat uneasy about how quickly the inflation can return to 2% on a sustained basis. 

US CPI

Source: Finlogix

A Quiet End to 2023 for CPI

I experienced a modest pickup in headline inflation in December, but that didn't disrupt the overall downward trend that is still in progress. The CPI for December increased by 0.3%, slightly higher than the expected 0.2% rise. Prices excluding food and energy also saw a 0.3% increase, aligning with expectations.

The welcome relief from lower gasoline prices in October and November didn't repeat in December. Gasoline prices edged up by 0.2% after seasonal adjustment, and a 0.9% increase in energy services contributed to the firmer headline reading. Meanwhile, food inflation showed little change over the month, with grocery prices up by 0.1% and prices for food-away-from-home up by 0.3%. Despite the lack of improvement in food and energy inflation monthly, the growth in both categories has slowed over the past year, providing tangible relief to consumers.

Core goods prices remained unchanged in December, a slightly stronger outcome than anticipated. Prices for used autos increased by 0.5%, following a 1.6% gain in November, while new vehicle prices rose by a smaller 0.3%. The end of the UAW strikes, and other private sector measures of automobile prices lead me to believe that this recent increase in auto prices will likely reverse in the coming months. In other sectors, household furnishing prices remained in deflationary territory, falling by 0.4%, as did recreation goods (-0.5%). Core goods prices remained relatively flat in 2023, rising just 0.2% year-over-year in December. This pace of inflation aligns roughly with the pre-pandemic trend, suggesting that price growth for this part of the economy has largely normalized.

Although progress in reducing core services inflation continued in December, it remains slower compared to core goods. Services prices excluding food and energy rose by 0.4% (0.44% unrounded) in December, slower than the pace averaged in 2022 but still well above the 0.25% run rate averaged in 2019. Shelter inflation, the biggest component of core services, saw a 0.4% increase in rents and a 0.5% increase in owners' equivalent rents, which was only slightly stronger than expected. This key component of the CPI is still running well above the rate of core inflation on a year-over-year basis. However, it is a slow-moving part of the index, and more timely measures of rental inflation suggest that the downshift that began in 2023 will gather momentum in 2024. In other sectors, airfares rose by 1.0% after a string of monthly declines, while motor vehicle insurance maintained its torrid pace of increases, rising by 1.5% in December.

Stepping back and reflecting on the past year, inflation showed a significant slowdown in 2023. At 3.4%, my headline inflation on a year-over-year basis is over three percentage points lower than it was at this time last year. The deceleration in inflation, combined with a resilient job market, has contributed to positive real wage growth and supported consumer spending. On a year-over-year basis, core CPI inflation is higher at 3.9%, but the past year has witnessed a meaningful reduction in price growth when excluding the more volatile food and energy categories. In December 2022, the core CPI was up by 5.7% on a year-ago basis.

Looking into the future, I anticipate that inflation will continue to ease along its trend. Although energy prices have stabilized, the decline in food-related commodity prices suggests that food inflation will continue to slow in the coming months. Goods prices, especially for vehicles, likely have further room to decline following improvements in supply chains and a more subdued demand from consumers. Simultaneously, shelter inflation is expected to slow down further due to the lag between official and private sector measures of housing costs. A more balanced labour market, characterized by greater labour supply, reduced turnover, and slower wage growth, should also contribute to easing inflationary pressures in the upcoming year. However, the improvement is expected to be more gradual compared to the previous year. I anticipate my headline CPI to slow to around 2.3% year-over-year by this time next year, with core CPI easing to a little under 3%.

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