CPI Update: December 2022

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

The Bureau of Labor Statistics announced in their November report that the Consumer Price Index (CPI) rose 0.1% (7.1% annual change). This is one of the most optimistic updates of the year, and a significant shift downwards from October’s high of 0.4%. Core inflation was 0.2% for the month, which is happily down from 0.3% in October.

Core goods prices have fallen quite rapidly and were actually negative contributors this month, while core services continue their downward trend. This has been most evident in used-car prices which have recently rapidly fallen.

Though shelter costs remain a strong contributor to the current inflationary environment, it’s important to remember that these indices are quite backward-looking. Most leases are on an annual basis and so there is a noteworthy lag from six to twelve months in the CPI calculations. Former CEA Chairman Jason Furman substituted new leases into the calculator and core CPI actually fell by a staggering -1.2%.

The key takeaway is that the Fed’s tightening cycle has drastically affected all the prices in the CPI even if they haven’t materialized in the current rent estimates. This is a slightly optimistic review; taken correctly, with the recent 50bps rate hike, the Fed may be close to the terminal rate and feel that they have adequately addressed inflationary concerns. The pace of rate hikes can be expected to slow over the next few FOMC meetings. In that case, we expect inflation to moderate and a soft landing as mortgage rates have peaked, and new leases enter the existing CPI calculations.

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