CPI Update: Entering 2023

by Mike Tubbs, Quantitative Portfolio Analyst, with Lauren Rosales-Shepard, Content Writer

The U.S. inflation outlook continues to show strong signs of improvement! Headline inflation for December was -0.1%, bringing the annual rate down to 6.5%. It’s worth noting that this is the largest month-over-month decrease since April 2020 during peak-COVID.

Energy prices were the strongest contributing factor, with gas prices falling dramatically in the course of the month (as you yourself probably noticed firsthand). These dropped by a whopping 9.4%, and were additionally down 1.5% from a year ago.

Core inflation was 0.3% for the month, with shelter driving the majority of these changes. Still, this draws the annual core inflation number down to 5.7% from December 2022 to December 2021. Compared to where the economy was last December, the annualized inflation numbers are much lower and are showing strong signs of improvement. While annualized core inflation is still elevated, this marks a full quarter of core prices growing much more slowly than the aggressively high rates witnessed over the last year.

As we have continued to echo in our previous reports, there is more positive news on the horizon–in particular, because new rent contracts are yet to be fully integrated into current inflation statistics. Remember, the average American doesn’t renew their lease every single month! The pace of shelter inflation is slowing dramatically in real-time data and this will begin to leak into the CPI report over the next three to six months.

Core inflation could also see a continued reduction. The Federal Reserve has orchestrated a significant reduction in core inflation over a three to six month window, all while adding an abundance of jobs. December posted a positive 223,000 new jobs, and the unemployment rate fell to 3.5% during this period.

The bottom line? A soft landing without a recession still remains the most likely scenario for the macroeconomy.

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