Down 0.1%

• Topline Consumer Price Index declined by 0.1% in December 2022
• The pace of gains in the Core Consumer Price Index (CPI), less Food & Energy, was steady at 0.3% in December 2022
• Services inflation accelerated in December 2022 to a 0.6% monthly gain
• Housing & Food price growth remained cause for concern to close out 2022, up 0.7% and 0.3%, respectively
  
  

The topline Consumer Price Index (CPI) for December 2022 was down by 0.1% in seasonally-adjusted terms versus the month prior. Continued sharp monthly declines in energy prices drove the topline measure to its first monthly decline in January 2019 – outside of the economic chaos that reigned in the early months of the COVID-19 pandemic. The December reading translates to a 6.4% year-over-year gain in topline prices. More importantly, when evaluating current conditions, the December monthly rise equals a -0.9% annualized pace, representing consumer price inflation conditions if December’s pace were to be maintained for a one-year period. Hurdles remain in achieving the Federal Reserve’s goal of a sustained pace of 2.0% year-over-year consumer price inflation, but the December reading provides little cause for concern that inflation is not securely on the right path toward that end.

Core CPI – which excludes volatile Food and Energy prices, and which the Federal Reserve eyes most closely when setting monetary policy – saw its monthly growth rate rise modestly to 0.3% in December 2022, up from 0.2% in November. At a 3.7% annualized growth pace in December, Core CPI suggests that the Fed will remain comfortable communicating that the fight against inflation is not over and that further interest rate hikes are on the cards. But inflationary pressures upstream from consumer prices have clearly eased. Producer prices are showing no signs of reacceleration, thanks in large part to relatively tame energy markets. And while energy prices are excluded from the Core CPI measure, their impact in virtually every facet of consumer prices, from raw materials inputs to transportation of goods to market, remains notable. With waning supply-side price inflationary pressures entrenched and consumer demand likely to fall off in early 2023, Core CPI should remain on a path toward the Fed’s goal.

The Housing component of the CPI index remains a concern for overall consumer price inflation. Housing CPI, which includes rents, household furnishings, and energy bills, rose at an annualized pace of 8.9% for December 2022. This component of the CPI measure is the largest influence on prices by weight, accounting for over 40% of the total index. Homebuying has collapsed in 2022, with existing home sales falling to a sales pace not seen since 2011. The upshot here is that fewer household budgets are taking on the expenses encompassed by the still-accelerating Housing component of CPI. But for the many who purchased homes in 2020 and 2021, rising costs will continue to erode household finances, which sets the stage for consumers hitting a wall in their spending capacity by mid-2023.

Services CPI inflation accelerated in December 2023 to a 0.6% month-over-month pace. This is up from 0.3% in November and is the strongest monthly result for this component metric since September 2022 (+0.8%). Services spending represents the destination for much of the U.S. expenditure of “excess savings” accumulated during the pandemic when stimulus funds were distributed but were not able to be spent due to government-mandated business closures and travel restrictions. Estimates suggest that that mountain of savings declined from $2.1 trillion to less than $1.0 trillion in 2022 as pent-up demand for travel and recreation was expressed. Job creation remained robust through the end of 2022, and so consumer sentiment should push that savings level lower still, and Services prices will continue to see strong upward demand-side pressure as a result. This CPI component will likely remain a touchpoint for Federal Reserve officials’ commentary as they continue to communicate that they do not consider the fight against inflation to be complete, and that tight monetary policy conditions are warranted.

Energy prices continued to provide relief to U.S. consumers in December 2022. Gasoline prices fell by 9.4% for the month and are now down by 1.5% year over year. On a related note, the Transportation component of topline CPI was down for a second consecutive month in December, falling by 2.5% after declining by 1.1% in November. Used vehicle prices played a significant role in this move, posting their own sixth consecutive month of declines (-2.5% in December 2022). While Housing and Food & Beverage prices continue to erode consumer discretionary spending as necessities whose prices continue to rise, there is some offset as households’ transportation expenses continue along their path toward pre-pandemic norms.