EconoFACTS

January 12, 2023 | 09:19

U.S. CPI: 25 or 5 to 0

Economist

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Another relatively mild inflation report is welcomed news and could tip the odds toward the Fed dialing down the pace of rate hikes to 25 bps at the next meeting. (If you're wondering about the title, apologies to that great Chicago song.)

For a change, the CPI report was pretty much bang on the consensus call, with the headline index declining 0.1%, chopping the yearly pace to 6.5% (lowest since October 2021) from 7.1%. A 9.4% slide in gasoline will do that. More encouraging is that food costs rose just 0.3% and have been walking down the staircase for several months (though still up 10.4% y/y). Core prices rose an expected 0.3%, which was a step up from the prior month's pace but good enough to lower the 3-month annualized rate to 3.1% (the lowest since September 2021) and well below the current 5.7% yearly rate, which was down from 6.0% in November and the four-decade peak of 6.6% in September. Core goods prices fell for a third straight month (by 0.3%), led by falling used vehicle prices and the first decline in new auto prices in a while.

On the services side, rent remained the biggest forward driver, with both primary rent and OER clocking in at 0.8%, at the high end of recent ranges. However, with both market rents and home prices under pressure, we should see this pressure start to diminish likely by the spring.

Largely because of the rent categories, core services prices (less a 1.5% pop in energy services prices) rose 0.5% (and 7.0% y/y). Tempering the increase were declining airfares and hotel rates, and a further sharp drop in health insurance premiums. Despite the latter, medical care services prices edged higher after big drops the prior two months. Core services prices excluding rent of shelter rose a moderate 0.26%, while the overall core ex-shelter measure has fallen for three consecutive months. Nice.

Bottom Line: The report will be welcomed news at the Fed, as two out of three of Powell's key inflation categories (core goods, shelter, and core services ex-shelter) are now moving in the right direction: down. And it's only a matter of time before the shelter component rolls over. Three months of relatively lighter core inflation figures is starting to form a trend... one that could spur the Fed to slow the pace of tightening further on February 1.

Table 1 - United States — CPI

(month/month % change : s.a.)

Source: BMO Economics, Haver Analytics