Posted on January 15, 2023.

The biggest surge in U.S. inflation in more than 40 years is ebbing, but prices are still rising and it’s unclear if the slowdown in the pace is fast enough to forestall further increases in interest rates by the Federal Reserve.

Here’s what to watch in the consumer price index on Thursday morning.

The forecast

The consumer price index is forecast to fall 0.1% in December mostly due to falling gasoline prices, according to economists polled by The Wall Street Journal.

If so, it would mark the first decline since May 2020. That’s when most of the U.S. was locked down after the onset of the coronavirus pandemic.

The increase in inflation over the past year, meanwhile, is expected to slow for sixth month in a row to a 6.5% rate from 7.1% in the prior month.

Inflation peaked at 9.1% in June, the highest rate since 1982.

” A lot of price increases have slowed,” said Richard Moody, chief economist at Regions Financial.

‘Core’ inflation

The headline CPI number is not the biggest one in the inflation report though. The Fed and investors pay closer attention to the increase in consumer prices minus food and gas since it’s viewed as a better predictor of future inflation trends.

This so-called core CPI is forecast to rise 0.3% in December. Any number larger than that would likely spook Wall Street.

The yearly rate of core inflation is seen slowing to 5.7%% from 6% in the prior month. The rate peaked at 6.6% in September.

Labor costs

The Fed’s biggest worry about inflation right now is a rapid increase in wages. Unless wage growth tapers off, they believe, inflation could get stuck well above the central bank’s 2% target.

Fed Chairman Jerome Powell and other senior officials are monitoring what they call core services minus shelter as a proxy for worker compensation. It excludes energy and rent and largely reflects what businesses pay for labor.

The problem is, there is no such category in the CPI report. The Fed does its own complicated math to come up with the number.

A close relative that investors can use as a quick substitute is “services less rent of shelter.”

The good news, these costs have fallen in the past two months to mark the first back-to-back declines since early in the pandemic.

The rate of yearly inflation in that category also subsided to 7.3% in November from a peak of 8.2% two months earlier.

What’s more, the U.S. employment report for December also showed that wage growth is slowing.

Rents and housing

Another big source of inflation under the mindful eye of the Fed has been rising rents and housing prices. Yet the cost of shelter also appears to be slowing due to high interest rates and resulting softness in the economy.

The slowdown in housing costs, however, is not expected to show up in the CPI for awhile because of technical quirks in how the government calculates them. Price trends in the shelter index lag other goods and services by up to six months.

The yearly increase in the cost of shelter rose to a 40-year high of 7.1% in November, up from 3.8% a year earlier and just 1.9% two years ago.

That number is all but certain to come down soon, however.

“Rents are slowing,” said Lisa Cook, a member of the Fed Board of Governors, in a speech last week. But “the housing services index tends to adjust quite slowly.”

Goods prices

After soaring early in the pandemic, the cost of goods is no longer rising rapidly.

Goods prices minus food and energy have fallen two months in a row, lowering the yearly rate of increase to 3.7% from a peak of 12.4% in February.

Source: www.marketwatch.com