U.S. Inflation Picks Up

U.S. inflation accelerated at the end of 2023, fueled by stubborn services costs while a protracted decline in goods prices petered out.

The consumer price index (CPI) increased 3.4 percent in the year through December, the most in three months, according to government figures. It also rose by more than forecast on a monthly basis, as housing costs continued to climb, Americans paid more to drive, and energy prices advanced for the first time since September.

The figures show that the Federal Reserve is facing a bumpy path to tame inflation, which risks staying elevated in coming months should the prices of goods, such as clothing and cars, continue to climb. Fed policymakers and Wall Street economists have been starting to question the durability of the recent downturn, which has largely stemmed from improving supply chains.

Much of the surprise in so-called “core goods,” which excludes energy and food, came from pickups in prices for used cars and apparel, despite year-end promotional activity. Services prices also held firm, notably within costs for housing and car insurance, which rose the most on an annual basis since 1976.

“The concern that must be growing in the Fed’s mind at this point is that we are now getting less deflation and disinflation from goods and energy prices, and we still have yet to see a measurable reduction in inflation in housing or most services components,” Scott Anderson, chief U.S. economist at BMO Capital Markets, said in a note. “This suggests the Fed’s journey to sustainable 2.0 percent inflation is still not complete.”

Even so, the figures cap a year in which inflation broadly eased without doing much damage to the labor market, setting the stage for the Fed to lower borrowing costs this year. Officials’ latest economic projections show that they expect three rate cuts in 2024, though policymakers have pushed back against market expectations that the first reduction could come as soon as March.

The S&P 500 fell and Treasuries fluctuated after the release from the Bureau of Labor Statistics (BLS). Fed officials next meet at the end of this month.

Shelter prices, which make up about a third of the overall CPI index and contributed to more than half of its advance, rose 0.5 percent in December. The gain included a rise in hotel prices, which were lower in the prior month. Economists see a sustained moderation in this category as key to bringing core inflation down to the Fed’s target.

Excluding housing and energy, services prices climbed 0.4 percent from November, easing slightly from the prior month, according to Bloomberg calculations. While Fed Chair Jerome Powell and his colleagues have stressed the importance of looking at such a metric when assessing the nation’s inflation trajectory, they compute it based on a separate index.

That measure, known as the personal consumption expenditures (PCE) price index, doesn’t put as much weight on car prices as the CPI does. That’s one reason why economists don’t see the core PCE gauge rising as firmly when it’s released later this month. That set of indexes has been trending much closer to the Fed’s 2 percent target.

Friday’s release of the producer price index will provide more clues, as several categories within that report feed directly into the PCE calculation.

What Bloomberg Economists Say…

“The surprisingly strong CPI print for December shows the road to a durable return to 2 percent inflation is bumpy, and the last mile could be difficult. Some of the disinflationary impulse for core goods—a key driver of easing price pressures over the past few months—has faded. It likely will take more than the much-anticipated disinflation in rents for inflation to get to the Fed’s 2 percent target.”

— Anna Wong & Stuart Paul

Separate figures on Thursday showed that initial applications for unemployment insurance held at a historically low level last week, while the number of people receiving benefits fell to the lowest level since October.

The Fed is looking for softer labor-market conditions to rein in demand across the economy, especially after last week’s mostly solid jobs report. A separate report Thursday showed real earnings advanced 0.8 percent in December from a year earlier, extending a months-long streak in which wage growth has modestly outpaced inflation.

Toward the end of the year, U.S. consumers grew more sanguine about the inflation outlook, with several metrics of near-term expectations declining to the lowest levels since early 2021. That’s helped lift measures of consumer sentiment.

However, it hasn’t been the same boon for Joe Biden. Despite the progress on easing price pressures, inflation has dogged Biden’s presidency, with his approval rating at similar level today as it was when the overall CPI peaked above 9 percent in June 2022.

Voters rank this issue, along with the broader economy, of high importance for this year’s election, but further softening in the jobs market could undercut the political benefits of slower inflation.

Looking ahead, inflation is expected to moderate further this year toward the Fed’s 2 percent target, especially as housing costs ease. However, other factors like rising shipping costs due to attacks in the Red Sea and low water levels in the Panama Canal threaten to up-end progress in goods deflation, while an escalation of the war in the Middle East—which could put upward pressure on oil prices—can’t be ruled out.

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