The prices consumers pay for a variety of goods and services rose more than expected in December, according to a measure from the Labor Department on Thursday, showing that inflation is still gripping the US economy.
The consumer price index rose 0.3% for the month, better than the estimate of 0.2% at a time when most economists and policymakers see easing inflationary pressures. On a 12-month basis, the CPI closed 2023 with an increase of 3.4%. Economists polled by Dow Jones had expected a year-on-year rise of 3.2%.
By comparison, the annual CPI gain in December 2022 was around 6.4%.
Excluding volatile food and energy prices, so-called core CPI also rose 0.3% for the month and 3.9% from a year ago, compared with respective estimates of 0.3% and 3.8%. The year-on-year baseline was the lowest since May 2021.
Much of the increase was due to rising shelter costs. The category rose 0.5% for the month and accounted for more than half of the increase in core CPI. Year-on-year, accommodation costs increased by 6.2%, i.e. by two-thirds of the increase in inflation.
Fed officials largely expect shelter costs to decline over the course of the year as renewed leases reflect lower rents.
Stock market futures were negative after the release, while Treasury yields held slightly higher.
Food prices increased by 0.2% in December, as in November. Egg prices rose 8.9% month-on-month, but were still down 23.8% year-on-year. Energy posted a 0.4% gain after falling 2.3% in November as gasoline rose 0.2% but natural gas fell 0.4%. Ticket prices increased by 1% for the month.
In other key price indexes, motor insurance rebounded 1.5% higher, medical care accelerated 0.6% and used car prices, the main contributor to the initial rise in inflation, rose another 0.5% after November increased by 1.6%.
Inflation-adjusted wages rose 0.2% month-on-month, while rising a modest 0.8% from a year earlier, the Bureau of Labor Statistics said in a separate report.
Fed officials are paying particular attention to service prices as evidence of whether inflation shows lasting signs of returning to the central bank’s 2% target.
Non-energy services increased by 0.4% in the month and by 5.3% compared to the previous year.
The inflation data covers the same month that the Federal Reserve held its key borrowing rate steady for a third straight session. Along with the decision, policymakers indicated they could begin cutting rates this year if inflation data continues to cooperate.
Despite the higher-than-expected inflation readings, futures traders continued to attribute a strong possibility that the Fed will start cutting interest rates in March. CME Group’s FedWatch futures price indicator indicated about a 69% chance of a March cut, slightly higher than where it was on Wednesday.
But the likelihood also reflects the gap between the market and the Fed over the timing and extent of rate cuts in 2024. Markets expect six rate cuts this year; The Fed’s projections point to just three.
“These are not bad numbers, but they show that progress in disinflation is still slow and unlikely to go straight to 2%,” said Seema Shah, chief global strategist at Principal Asset Management. “Of course, if shelter inflation is stubbornly elevated, the Fed will still be dismissive of the idea of an imminent rate cut.”
In recent days, several policymakers have shied away from committing to easier monetary policy.
New York Fed President John Williams said on Wednesday that inflation had clearly eased from its more than 40-year peak in mid-2022 and was making solid progress. But he gave no indication of when he thought a rate cut would be appropriate, insisting that “restrictive” policy was likely to remain in place for some time.
Other officials, such as Fed Governor Michelle Bowman and Dallas Fed President Lorie Logan, also expressed skepticism and said they would not hesitate to raise inflation if inflation were to rise.
The comments come against a resilient economic backdrop, with unemployment holding below 4% and consumers continuing to spend despite evidence of rising debt and shrinking savings.
In other economic news Thursday, the Labor Department said initial jobless claims were little changed at 202,000, below the Dow Jones estimate of 210,000.
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