December’s core inflation reading rises less than expected

Stock market surges on the month’s 0.2% core rate

December’s core inflation reading rises less than expected

Stock market surges on the month’s 0.2% core rate
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December prices for goods increased at a higher rate than in previous months, but it was close to market expectations, as the consumer price index (CPI) rose a seasonally adjusted 0.4% for the month and 2.9% for all of 2024, according to the Bureau of Labor Statistics. But the core inflation rate, minus food and energy, was only 0.2%, which was below industry expectations.

The CPI measurement of 0.4% was hotter than the median expectation of 0.3%, but the 12-month inflation reading of 2.9% was in line with market forecasts. The index for all items, less the categories of food and energy, rose 0.2% for December, after increasing 0.3% in each of the previous four months and were up 3.2% for the past 12 months. The lower core CPI figure was seen as good news by economists and the overall market.

A trend to watch was that inflation for all items during the past six months has steadily risen from -0.1% in June to 0.4% in December. Energy costs, which were up 2.6% in December, accounted for 40% of the month’s elevated inflation rate. All items in this category increased in price, with gasoline and fuel oil both rising 4.4%.

The food index increased 0.3%, as both eating at home and in restaurants was up that amount. Other indexes that increased include shelter, airline fares, used cars and trucks, new vehicles, motor vehicle insurance and medical care.  

Among the few indexes that decreased in December were personal care, communications and alcoholic beverages.

The encouraging inflation report sent stocks surging on Wednesday morning, with the Dow Jones Industrial Average rising more than 600 points in early trading. Wall Street was feeling relieved following Tuesday’s mild producer price index and Wednesday’s benign consumer price index. The two back-to-back inflation gauges showed that core inflation was still slightly below expectations, despite the higher overall inflation rate when all categories are considered.

Wells Fargo economists Sarah House and Michael Pugliese wrote in an inflation report Wednesday morning that December matched the hottest monthly reading of 2024, but the results were better than they appeared at first glance.  

“Headline CPI inflation was 0.4% in December, roughly matching the hottest monthly reading of 2024. Higher prices for food and energy contributed to the jump in the CPI. Excluding food and energy, monthly inflation was a healthier and more moderate 0.2%,” the economists wrote. “We believe the resiliency of the U.S. labor market, stickiness in inflation and uncertainty emanating from federal economic policy will keep the (Federal Reserve’s Federal Open Market Committee) on hold for the next several months. We now expect two 25 bps rate cuts this year, in September and December, down from the three rate cuts we expected coming into the year.”

First American Financial Corporation’s Senior Economist Sam Williamson said December’s CPI report brings a mix of news, including a glimmer of optimism. He expects the Fed may need more evidence that inflation is under control in 2025 before implementing expected rate cuts later this year.

“The monthly increase in the less volatile and more closely watched core CPI slowed and was below expectations, retreating slightly to 0.2% from the 0.3% pace of the previous four months,” Williamson said. “This downside surprise in core CPI is encouraging, but one month does not make a trend. The Federal Reserve will likely need to see sustained progress before considering any rate cuts.”

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