December CPI In-Line

by | Jan 13, 2023 | Blog, Bonds

CPI was right on the screws with expectations at -0.1% on headline and +0.3% core. But the details do paint a picture of lingering pressures at the core. Core services rose by 0.5%, up from the 0.4% in November. Owners’ equivalent rent rose by 0.8%, the highest increase in 3 months.


Source: Strategas. As of 1/12/23.


Rents Continue to Pressure Inflation Upwards


There was a notable upside surprise to shelter, which printed 0.8% (vs 0.7% exp). Real-time rents have slowed, so the upside surprise is something that is poised to slow here in 2023 (CPI rents and OER lag real-time rents by about 1 year).  Although market rents are no longer rising, and have in fact declined in recent months, the lagged effects of past increases are still feeding putting upward pressure on CPI rents and OER.

As shown below, CPI rents are still about 7%-10% below market rents, which is explained by the fact that some homeowners are locked into older leases which have not yet been market to market. As these leases reset, rents will almost certainly be adjusted higher.


Source: Jefferies. As of 1/12/23.


Goods Continue to Deflate


Goods deflation continued for the third straight month, led by used cars -2.5% and new cars -0.1%. The drag in December came mostly from volatile components, including energy (-4.5% m/m), food (0.3% m/m, which was the smallest increase since Mar’21), used cars (-2.5%), tech products (-0.9%), and airfares (-3.1%).

Core services ex-shelter and medical (a new favorite of the market) rose a pretty modest 0.25% and now annualizing at 5.0% over the last 3 months. Energy prices were down, but some of the core services components rebounded a bit this month, so this composition of the number may not be as encouraging as the headlines (more on energy below). For example, both medical care services and transportation services were up on the month after negative readings last month. The Fed has flagged core services as the most important component for monetary policy.


Source Citadel. As of 1/12/23.


As noted, energy contracted 4.5% m/m. This past month saw one of the most disinflationary impulses that’s been seen in this category other than extreme crises. We don’t expect energy deflation to continue, especially given the China reopening.


Source: US Bureau of Labor Statistics. As of 1.12.23.


Tight Jobs Market Likely to Keep Service Inflation Elevated


The real story is whether inflation continues to grind lower to 2%, or stops decreasing. The softening of inflation the last couple months has led to hopes across the market that the Fed has indeed slayed inflation, with inflation coming right back down to their target. This would in turn allow the Fed to soften policy (cut rates) and give us the so called soft landing.

In reality, while inflation is slowing sharply around the edges (food/energy, core goods), core/sticky prices remain sticky. So for now, we have a Goldilocks scenario as inflation data continues to leak lower and appears to be under control. In our opinion, this could change as the base effects wash out the y/y calculation. At that point, core inflation is likely to settle around 3.5%, and we see it as difficult in breaking below that level without substantial further weakness in the labor market (which isn’t happening yet, see below).


Source: Strategas. As of 1/12/23.


My takeaway is while inflation is slowing, the Fed may not be happy with how quickly it is slowing. As I have been firm in saying, I tend to disagree with the quick return and recapture of 2% inflation. In saying that, I’d expect a step down to 25bps come Feb 1 in response to today’s data but no change in the terminal rate (still >5%).





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The Consumer Price Index (CPI) measures the change in prices paid by consumers for goods and services. The CPI reflects spending patterns for each of two population groups: all urban consumers and urban wage earners and clerical workers. 

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