The U.S. annual inflation rate came in hotter than economists expected, rising to 3.4 percent in December and fueled by the “usual suspects.” Even as the Consumer Price Index (CPI) has slowed considerably since topping 9 percent in June 2022, sticky and stubborn inflation might be challenging to defeat in the economy.
Last month, the Sticky-Price CPI—that is, price changes for goods that occur slowly and less often, such as automobile costs, housing, and medical expenses—clocked in at 4.6 percent. This was down from 6.6 percent in January 2023 but remains at a more than three-decade high.
Since 2021, cumulative inflation has spiked by about 18 percent.
Bureau of Labor Statistics data show that there has been progress in the inflation fight, with many CPI components shifting to deflation and disinflation. However, other goods are proving to be stuck at an elevated level or have witnessed renewed growth. In addition, services inflation continues to be stubbornly high, trending at or above 5 percent for seven consecutive months.
During the pandemic, goods inflation spiked as millions of people were confined to their homes and many businesses were closed. Once COVID-era restrictions eased, consumers began traveling again, visited recreational centers, and took trips to movie theaters and concert venues.
The Federal Reserve has been paying close attention to the services side, warning of very little progress on this part of its war on inflation, according to minutes from the policymaking meeting of the Federal Open Market Committee in December.
Shelter and Car Insurance
“CPI did come in higher than expected above your headline level, but you don’t miss the usual suspects,” Greg McBride, the chief financial analyst at Bankrate, told The Epoch Times. “Shelter and motor vehicles really both continue to post outsized increases.”Motor vehicle insurance surged 1.5 percent monthly in December and is up more than 20 percent compared with the same time a year ago. This was the fastest pace since December 1976, driven by growing labor costs, more expensive car parts for damaged vehicles, and higher vehicle prices.
The shelter index was above the annual rate of 6 percent and rose by 0.5 percent month over month in December.
Economists and market analysts expected this component of the CPI to have come down by now because it functions with a lag.
“There’s a lag, but when you sort of look out at the landscape, it’s really tough to pinpoint when exactly that is going to show up in the shelter component on the inflation index because that’s what’s contingent on rents,” Mr. McBride stated.
Mr. McBride and others have argued that shelter, which accounted for more than one-third of the CPI, could be what finally brings down inflation.
The good news is that yearly declines in asking rents accelerated in November 2023, tumbling more than 2 percent year over year, according to Jon Leckie of Rent Research. Easing price growth has been triggered by below-average demand, growing inventories, and a return to seasonal price trends, the data show.
The challenge for many tenants is that pre-pandemic rent levels are elusive.
“On a longer-term basis, rents remain elevated. Since November 2019, months before the pandemic, prices have risen by more than 22 percent, adding $355 to monthly rent bills,” Mr. Leckie said in the recent report.
Disinflation a Slow Process
Core inflation, which excludes the volatile food and energy components, slowed to 3.9 percent in December, slightly higher than the consensus estimate of 3.8 percent.Core services ex-housing inflation, also known as supercore inflation, was unchanged at 3.9 percent year over year. On a monthly basis, it was flat at 0.4 percent, “suggesting some stickiness in the data,” according to Seema Shah, the chief global strategist at Principal Asset Management.
“Inflation progress has slowed in recent months, reinforcing the notion that it will be an arduous and rocky path back towards the 2% target and, as such, the Fed pivot may arrive slightly later than the market currently anticipates,” Ms. Shah said in a note.
“These are not bad numbers, but they do show that disinflation progress is still slow and unlikely to be a straight line down to 2 percent.”
Although there could be some roadblocks on the road to the Fed’s 2 percent target, the latest data support the central bank’s narrative surrounding inflation, Deutsche Bank economists said.
“Goods inflation seems to be largely ’solved,' and the labor market coming into better balance should reassure the Fed that core services ex housing will likely cool,” they wrote in a note.
Mr. McBride said he thinks that in the end, it is prudent to look beyond the noise and observe that inflationary pressures are moderating.
“We continue to see this trend of moderating price increases,” he said. “We’re still seeing a lot of positives; that’s the indicator moving in the right direction.”
According to the Federal Reserve Bank of Cleveland’s Inflation Nowcasting model, the CPI and core CPI readings are expected to slow to 3 percent and 3.8 percent, respectively.
Of course, the global economy remains vulnerable to inflationary threats, especially on the geopolitical front. Tensions in the Middle East have reached a boiling point amid chaos in the Red Sea, causing higher shipping and energy costs that could result in a temporary inflation revival throughout the world.
“Inflation is going to be seen throughout the world for those products that are being shipped,” energy economist Anas Alhajji said in a Spaces session on X, formerly known as Twitter. “This is a major, major issue.”
Following the U.S.-led attack on the Iranian-backed Houthi rebels in Yemen, crude oil prices surged on Jan. 12 by as much as 4.2 percent, to above $75, before retreating later in the trading session.
