Inflation Proves It Is Not Dead Yet as December Rate Hits 3.4% Annually

Inflation proved to be stickier than expected as 2023 came to a close, raising some doubt the Federal Reserve will be as quick to cut interest rates as markets would like.

The December monthly increase in the consumer price index came in at 0.3%, up from the 0.1% gain a month earlier, according to the Labor Department’s release on Thursday. On an annual basis, inflation ticked up to 3.4% from 3.1% previously.

The core CPI, stripping out energy and food costs, was unchanged but dipped down to 3.9% annually from 4% in November.

Increases in shelter costs contributed more than half of the overall rise in December. Government measures of housing costs tend to lag market rates, which have been trending down for apartment rental rates lately. Energy costs, a major contributor to declines in inflation in the past couple of months, played less of a role in December. Food costs moderated.

Economists had predicted a monthly increase of 0.2% and an annual level of 3.2%.

The CPI has fallen sharply from its peak of 9.1% reached in June of 2022, but is still above the 2% annual target set by the Fed. Although the CPI is the more widely known barometer of inflation, the Federal Reserve pays more attention to the personal consumption price expenditures index, and that has been showing steady disinflation for a while. The central bank decided at its meeting last month to leave interest rates unchanged while also penciling in at least three cuts in 2024.

Markets rallied on that news but have since sold off as a strong December jobs report left some questioning how quickly those cuts would materialize. The Fed did warn that, should the economy perform stronger than expected, it retains the option to increase interest rates, though the probability of that is seen as low.

“Today’s report is a reminder that it will take time for inflation to fall to the Fed’s 2% target. With core inflation still near double the Fed’s target, we remain skeptical that the FOMC will cut the overnight rate as soon as the March meeting,” said Phillip Neuhart, director of market and economic research at First Citizens Bank Wealth Management.

Economists had begun changing their tune in recent days, warning that the “last mile” of getting inflation down to a 2% level would be difficult, especially as the economy generally was performing better than expected and the labor market was still quite strong. On Thursday, the number of people filing first-time claims for unemployment benefits came in at 202,000, a level that is not indicative of a weakening job market.

“Due to more robust job numbers and higher wage growth in the recent jobs report, we are concerned that services inflation may be sticky for some time,” says Venkat Balakrishnan, head of asset allocation at Mission Square Retirement. If the inflation reading is higher than expected, it may potentially delay the market’s anticipated early rate cuts for 2024.”