Inflation News Is Good But Not Good Enough

Some good news on the inflation front, but probably not good enough to make the Fed change its direction yet.

The Consumer Price Index for All Urban Consumers (CPI-U) — the standard measure that is discussed — actually declined by 0.1% in December 2022 for a 6.5% year-over-year increase. That’s down from the 7.1% year-over-year change in November. According to a number of sources, the drop was in line with consensus estimates.

Overall, that’s an excellent sign, as an actual turning point to a drop in prices month over month rather than just a slowdown of increase. Digging in a bit, things are messier. The decrease came largely from energy costs falling by 4.5%, due to the falling price of gasoline. But food, which can’t be ignored, was up 0.3% between November and December, and that becomes an immediate pain in the pockets of average consumers.

The index for all items less food and energy — core inflation — rose 0.3% in December after a 0.2% increase in November. In that sense, inflation was worse. A big contributor was shelter, meaning homes and multifamily. That had climbed 7.1% year over year in November while December saw it increase to 7.5%. Some other standouts in the 12-month price increase rate was fuel oil (for building that use it to heat) at 41.5% and energy services at 15.6%.

“The December CPI is another small step in the right direction, but it doesn’t alter our forecast for the upcoming meeting of the Federal Open Market Committee where we expect them to hike the target range for the fed funds rate by 25 basis points,” said Oxford Economics in an emailed statement. “This likely won’t be the final rate hike this cycle as the Fed is going to want concrete evidence that they have broken inflation, and that it is returning to their 2% objective. The response in financial markets and fed funds futures was fairly muted to the December CPI.”

And as Bill Adams, chief economist for Comerica Bank, noted in emailed remarks, “Inflation should continue to slow in 2023, allowing the Fed to pause rate hikes this spring and begin to gradually cut in the fall. However, the economy was already weakening at the end of 2022, and will likely experience a mild recession in 2023.”

For the housing sector of CRE, one possible concern might be how shelter continues to be a major driver upward of inflation, showing outsized growth. That could lead to consumer anger and resentment and potentially calls for more regulation.