The Labor Department reported December's consumer price data which showed a monthly decline in inflation for the first time since April 2020, when the U.S. was in the midst of a lockdown to combat the coronavirus. The data was enough to send stocks higher, while longer-term Treasury yields plummeted.
Even more impressive is that the labor market has continued to remain resilient despite numerous headwinds including a stringent Federal Reserve. Not only that, but there's evidence of a re-acceleration in growth with Q4 GDP estimated to come in above 3%, and China's reopening adding to short-term optimism. Additionally, inflation extremes caused by the pandemic and Russia's invasion of Ukraine like stressed and broken supply chains, rising freight prices, spiraling vehicle prices, higher rents, and soaring gasoline prices have all normalized.
Shelter costs are of particular interest as it makes up one-third of the CPI. However, it's a lagging measure based on the way it's calculated. Thus, real-time data is showing a decline in rents, but this may not show up for many months. Additionally, many analysts believe that the rental market could be due to a big shock given that multi-family housing was 'overbuilt' over the past decade relative to population growth and single-family housing. Thus, just like vehicles and energy, this inflationary component could soon be a deflationary force.
On an annual basis, headline CPI came in at 6.5% which was just below estimates of 6.6% which is the smallest increase since November 2021. Core CPI was up 0.3% on a monthly basis and 5.7% on an annual basis with both measures coming in line with expectations.
A big contributor to the weakness in the headline figures was the drop in gasoline prices, which isn't a part of core CPI. On a monthly basis, gasoline prices were down nearly 10% and down 2% from last year. However, food prices continued to gain with a 0.3% increase, while shelter prices were also up 0.8%.
Used vehicle prices, which soared during the early months of the pandemic due to a combination of low rates, stimulus payments, and supply chain issues causing a decline in new car production, were down 2.5% on a monthly basis and 9% compared to last year.
Following the CPI report, odds moved higher for a 25 basis point hike at the next Fed meeting, while the odds for a 50 basis points hike declined.