CIO Notebook: U.S. Inflation Trending Lower, Shelter Costs Remain Sticky

January 11, 2024

When combining both today’s inflation readings with the labor market data released over the last two weeks, there is evidence of continued strength in the economy which has the potential to keep inflation stickier for longer

December U.S. inflation data released today was once again slightly hotter than expected. Headline CPI was up +0.3% month-over-month and up +3.4% year-over-year, versus expectations of +0.2% and +3.2%, respectively. Core CPI was up +0.3% on a month-over-month basis and in line with expectations; the measure was up +3.9% on a year-over-year basis compared with a consensus expectation of +3.8%.

Shelter costs were up in December, rising by +0.5% month-over-month and +6.2% year-over-year, following a +6.5% increase in November. This was once again the largest factor in the increase in Core CPI this month. In addition, month-over-month, costs for auto insurance were up +1.5%, medical care was up +0.6%, and used cars and trucks were up +0.5%. Recreation, new cars, education and airline fares rounded out the other notable contributors to this month’s price increases, while household furnishings and personal care prices declined.

The modest, unexpected upside in headline CPI this month was driven by higher energy prices (in part due to adjustment) and certain pockets of food prices. While these increases tend to be reflected more readily in measures such as consumer confidence and approval ratings, they are likely less of a concern for the Federal Reserve (Fed) as they are trending either flat to lower over the more recent time period. Shelter, insurance and medical cost increases tend to be rather sticky and the sharp increases in these areas are admittedly more concerning as we consider the pace of decline in Core CPI.

U.S. weekly jobless claims data were also released, coming in at 202k versus consensus of 210k while continuing claims fell to 1.834M. Today’s inflation readings combined with the labor market data released over the last two weeks show evidence of continued strength in the economy, which has the potential to keep inflation stickier for longer. However, one could argue that the data is representative of the “bumpy” path to 2% that Fed Chair Jerome Powell has noted in several forums, meaning we need not pivot in our thinking in terms of a second half shift to more accommodative policy by the Fed. In addition, Core PCE, which is the Fed’s preferred inflation gauge, rose by +0.1% in November versus +0.3% for Core CPI; the January 26 release of December PCE could exhibit a softer number as well.

Equity markets have been pressured lower following today’s release, while both 2-Year and 10-Year Treasury yields moved higher in response. While macroeconomic data and the potential for changes in central bank policy have demanded the attention of investors over the past several weeks, focus is likely to shift to earnings over the next several days as investors look to companies to provide 2024 guidance, providing needed context in terms of what a potential economic “soft landing” could mean for sector, industry and company performance.


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