The rate of CPI inflation fell faster than expected in December. However, core inflation, which eats away at food and energy, has eased only in line with forecasts among inflation-resistant services. The S&P 500 rose moderately in the afternoon on Thursday Stock market action after the release of the consumer price index.
The CPI inflation rate slowed to 6.5% from 7.1% in the previous month and Wall Street expectations of 6.6%. The consumer price index fell 0.1% in the month vs.
Core CPI rose 0.3% vs. November levels, as expected. The annual core inflation rate decreased to 5.7% from 6%. The core CPI inflation rate reached a 40-year-high 6.6% in September.
Also on Thursday, the Labor Department also reported that new claims for unemployment benefits filed by 1,000 to 205,000 in the week to January 7, indicating that layoffs still need to be taken in a broad way.
The Fed is likely to continue to reduce the pace of rate hikes to a quarter-point with the next policy hike in Feb. up from 77% the day before.
The extent to which the Fed keeps pace after that will depend less on CPI than on wage growth, which is key to the outlook for service sector inflation. The good news for markets that fueled the S&P 500’s recent rally efforts is that wage growth showed a dramatic slowdown in December.
S&P 500 Reaction to CPI Report
Despite the possibility of another big upside move, the S&P 500 initially bounced between gains and small losses, before turning modestly late in the afternoon. The S&P 500 was up 0.5% as of 1:45 pm ET. The Dow Jones Industrial Average rose 0.7% and the Nasdaq composite 0.6%.
Meanwhile, the 10-year Treasury yield fell 10 basis points to 3.45%, nearing its lowest level since September.
The S&P 500’s recent rally from mid-October lows gained momentum in Jan. 6, when inflation data unexpectedly raised hopes that the Fed could end rate hikes before they hurt the economy.
The rally driven by the jobs report lifted the S&P 500 within 0.4% of its 200-day moving average. A few past rally attempts have fizzled around that point, but this one may have some legs.
The IS&P 500 ended 13.7% above the intraday bear-market low of October 13 on Wednesday, but remained 17.6% below its all-time close.
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Fed’s Powell Shifts Focus from CPI to Income
A further drop in the CPI inflation rate could allow the S&P 500 to continue moving higher, but it would not be the cause.
Wage growth has been central to the Fed’s policy outlook, so investors celebrated after the December jobs report showed a sharp decline in Q4. Average hourly earnings rose 4.6% from a year ago, below the 5% estimate, kick-starting the current S&P 500 rally. Earnings growth has now fallen to its lowest level since August 2021, down a full percentage point from the peak in March.
With wages growing at a 4% annual pace in Q4, wage growth appears to be slowing to near Fed Chairman Jerome Powell’s target of 3.5%. Reducing productivity growth to around 1.5%, wage growth of 3.5% could bring inflation in line with the Fed’s 2% target.
The most important cost of inflation going forward is personal consumption expenditures (PCE) for energy and housing services, Powell says. Core inflation is slowing and the same as housing inflation in 2023, given the slowdown in market rents. But inflation in non-electrical services, excluding housing, is likely to remain elevated as long as wage growth remains buoyant.
The IS & P 500 began to fluctuate after the CPI report showed that inflation in the prices of nonenergy services, which affects 56% of the budget of consumers, has not begun to decline. Prices of basic services increased by 0.5% in the month and 7% from last year vs. 6.8% in November.
However, that’s because the Department of Labor is ignoring rising housing prices. While new rental rates have been dropping for months, it takes about a year for that to be fully reflected in updated rents and the CPI.
Some analysts noted that non-residential services prices increased by 7.4% from last year. However, that category includes energy service prices, which increased by 15.6% from last year. Excluding energy and shelter, service prices increased by about 6.2% from last year.
To get a better idea of how the CPI core services inflation data compares to Powell’s focus on PCE core services minus housing, IBD made some changes. Food away from home, which is part of the PCE services division, was the only addition. Owner equity rent, primary residence rent and health insurance, which do not feed into the PCE inflation data, were subtracted.
The latest data looks generally good. While the prices of this batch of basic services increased by 6.5% from last year, the 3-month annual trend improved to 5% from 6.5% in November and 7.1% in October.
Meanwhile, inflation in commodity prices, excluding food and energy, has slowed from double figures at the beginning of the year. That progress continued in December. Core prices fell by 0.3% on the month. That brought annual inflation to 2.1% from 3.7% in November.
CPI Inflation Report Details
Prices for used cars and trucks fell 2.5% on the month and are now 8.8% below last year’s levels. New vehicle prices fell 0.1% from November, while annual inflation eased to 5.9% from 7.2% the previous month.
Energy prices fell by 4.5% in the month, while the annual increase moderated to 7.3% from 13.1% in November.
Food prices rose 0.3% on the month, as annual growth slowed to 10.4% from 10.6%.
First-time resident rents and owner-occupier rents increased by 8.3% and 7.5% from last year, respectively. Both were up 0.8% on the month.
Prices for transport services increased by 0.2% on the month and 14.6% from last year.
Prices for medical services rose by 0.1% on the month, after falling by 0.7% and 0.6% in the previous two months. That left the annual increase at 4.1%.
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