In December, U.S. consumer prices recorded a higher-than-expected increase, propelled by a continued uptrend in rents, a factor that may potentially delay the much-anticipated interest rate cut scheduled for March by the Federal Reserve. The latest data from the Labor Department’s Bureau of Labor Statistics revealed that the Consumer Price Index (CPI) rose by 0.3% last month, following a modest 0.1% increase in November, with the cost of shelter contributing to more than half of the CPI rise.
The 12-month period through December witnessed a 3.4% increase in the CPI, compared to a 3.1% rise in November. Economists surveyed by Reuters had forecasted a 0.2% monthly gain in the CPI, with a year-on-year increase of 3.2%.
Despite a slowdown in consumer inflation observed since June 2022, the progress towards lower inflation has been constrained by persistently high rents. While annual consumer price increases cooled from a peak of 9.1% in June 2022, the upward trend has been limited.
The latest CPI report follows the news from last Friday, indicating the addition of 216,000 jobs in November, accompanied by an acceleration in annual wage growth. Excluding the volatile food and energy components, the core CPI rose by 0.3% last month and 3.9% on a year-on-year basis in December.
Although consumer prices remain elevated, measures tracked by the Federal Reserve for its 2% inflation target have shown improvement throughout 2023. The personal consumption expenditures (PCE) price index, a key indicator, experienced its first monthly decline in over 3-1/2 years in November. However, rents, holding a larger share in the CPI basket, have a smaller weightage in the PCE index.
Financial markets, reacting to the data, indicated a roughly 69% chance of a rate cut at the Federal Reserve’s March 19-20 policy meeting, according to CME Group’s Fed Tool.
With the labor market remaining resilient and wage growth sustained, some economists now anticipate a rate cut in May or June. While the labor market is gradually easing, low layoffs and a tight labor market have prevented a recession, with claims for state unemployment benefits showing a minimal decline.
In summary, the unexpected surge in consumer prices, particularly driven by escalating rents, adds complexity to the Federal Reserve’s decision-making regarding the anticipated interest rate cut in March.
