CPI inflation report December 2023: Prices rose 0.3% higher than expected, annual rate at 3.4%

The consumer price index increased 0.3% in December and 3.4% from a year ago, compared with respective estimates of 0.2% and 3.2%
Excluding volatile food and energy prices, the so-called core CPI also rose 0.3% for the month and 3.9% from a year ago, compared with respective estimates of 0.3% and 3.8%.
Much of the increase came due to rising shelter costs. The category rose 0.5% for the month and accounted for more than half the core CPI increase.
Wages adjusted for inflation posted a 0.2% gain on the month, while rising a modest 0.8% from a year ago.

Prices that consumers pay for a variety of goods and services rose more than expected in December, according to a Labor Department measure Thursday that shows inflation still holding a grip on the U.S. economy.

The consumer price index increased 0.3% for the month, higher than the 0.2% estimate at a time when most economists and policymakers see inflationary pressures easing. On a 12-month basis, the CPI closed 2023 up 3.4%. Economists surveyed by Dow Jones had been looking for a year-over-year reading of 3.2%.

By comparison, the annual CPI gain in December 2022 was about 6.4%.

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Excluding volatile food and energy prices, the so-called core CPI also rose 0.3% for the month and 3.9% from a year ago, compared with respective estimates of 0.3% and 3.8%. The year-over-year core reading was the lowest since May 2021.

Much of the increase came due to rising shelter costs. The category rose 0.5% for the month and accounted for more than half the core CPI increase. On annual basis, shelter costs increased 6.2%, or about two-thirds of the rise in inflation.

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Fed officials largely expect shelter costs to decline through the year as renewed leases reflect lower rents.

Stock market futures were negative following the release while Treasury yields held slightly higher.

Food prices increased 0.2% in December, the same as in November. Egg prices surged 8.9% on the month, but were still down 23.8% annually. Energy posted a 0.4% gain after sliding 2.3% in November as gasoline rose 0.2%, but natural gas declined 0.4%. Airline fares increased 1% for the month.

In other key price indexes, motor vehicle insurance bounced 1.5% higher, medical care accelerated by 0.6% and used vehicle prices, a key contributor in the initial inflation surge, increased another 0.5% after being up 1.6% in November.

Wages adjusted for inflation posted a 0.2% gain on the month, while rising a modest 0.8% from a year ago, the Bureau of Labor Statistics said in a separate release.

Fed officials are paying particular attention to services prices as evidence for whether inflation is showing durable signs of getting back to the central bank's 2% target.

Services less energy increased 0.4% for the month and 5.3% from a year ago.

The inflation readings cover the same month that the Federal Reserve held its key borrowing rate steady for the third straight meeting. Along with that decision, policymakers indicated that they could begin cutting rates this year so long as the inflation data continues to cooperate.

Despite the higher-than-expected inflation readings, futures traders continued to assign a strong possibility that the Fed would start cutting interest rates in March. The CME Group's FedWatch gauge of futures pricing indicated about a 69% probability of a March reduction, slightly higher than where it stood Wednesday.

However, the probability also reflects a divide between the market and the Fed about the timing and extent of rate cuts in 2024. Markets expect six rate cuts this year; Fed projections point to just three.

"These are not bad numbers, but they do show that disinflation progress is still slow and unlikely to be a straight line down to 2%," said Seema Shah, chief global strategist at Principal Asset Management. "Certainly, as long as shelter inflation remains stubbornly elevated, the Fed will keep pushing back at the idea of imminent rate cuts."

In recent days several policymakers have avoided committing to easier monetary policy.

New York Fed President John Williams said Wednesday that inflation clearly has abated from its more than 40-year peak in mid-2022 and is making solid progress. But he gave no clues as to when he thinks rate cuts will be appropriate and insisted that "restrictive" policy is likely to stay in place for some time.

Other officials, such as Fed Governor Michelle Bowman and Dallas Fed President Lorie Logan, also expressed skepticism and said they wouldn't hesitate to hike should inflation turn higher.

Those comments come against a resilient economic backdrop, with unemployment holding below 4% and consumers continuing to spend despite evidence of rising debt loads and contracting savings.

In other economic news Thursday, the Labor Department reported that initial jobless claims were little changed at 202,000, below the Dow Jones estimate for 210,000.

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Consumer prices rose 0.3% in December, higher than expected, pushing the annual rate to 3.4%