Inflation ticked up in December while core growth slowed. According to the Bureau of Labor Statistics, the headline figure for the Consumer Price Index rose to 2.89% year-over-year, right in line with economist expectations. Additionally, core CPI came in lower than expected, slowing to 3.2% year-over-year. Compared to last month, headline prices were up 0.4%, as expected, while core prices rose 0.2% — lower than the expected 0.3% rise.
Here is the introduction from the BLS summary, which leads with the seasonally adjusted monthly data:
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent on a seasonally adjusted basis in December, after rising 0.3 percent in November, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 2.9 percent before seasonal adjustment.
The index for energy rose 2.6 percent in December, accounting for over forty percent of the monthly all items increase. The gasoline index increased 4.4 percent over the month. The index for food also increased in December, rising 0.3 percent as both the index for food at home and the index for food away from home increased 0.3 percent each.
The index for all items less food and energy rose 0.2 percent in December, after increasing 0.3 percent in each of the previous 4 months. Indexes that increased in December include shelter, airline fares, used cars and trucks, new vehicles, motor vehicle insurance, and medical care. The indexes for personal care, communication, and alcoholic beverages were among the few major indexes that decreased over the month.
The all items index rose 2.9 percent for the 12 months ending December, after rising 2.7 percent over the 12 months ending November. The all items less food and energy index rose 3.2 percent over the last 12 months. The energy index decreased 0.5 percent for the 12 months ending December. The food index increased 2.5 percent over the last year.
The first chart is an overlay of headline CPI and core CPI (excludes Food and Energy) since the turn of the century. The highlighted two percent level is the Federal Reserve's target inflation rate. In December, headline CPI accelerated for a third straight month to 2.89%. Additionally, core CPI slowed to 3.24%, its lowest level in four months.
In this next chart, we have narrowed our timeline to start at 2007. Core CPI was above 2% from the end of 2015 through February 2017 only to flip-flop again until the COVID-19 pandemic in April 2020, when it fell below 2%. The more volatile Headline CPI has spent part of the last five years under the 2% lower benchmark, and much of the volatility in this metric has been the result of broad swings in gasoline prices (more on gasoline here). Beginning in April 2021, both Core and Headline have been above the 2% benchmark.
The next chart shows both series since 1957, the year the government first began tracking core inflation. Over the past two years, we have seen some of the highest inflation rates since the second of the two recessions in the early 1980s. Over the past few years we have slowly made our way back down but inflation has proven sticky. Core CPI is currently sitting at a level last seen in the early 1990s, while headline CPI is near levels seen in the early 2010s.
Consumer Price Index Components
Here is a table showing the annualized change in Headline and Core CPI, not seasonally adjusted, for each of the past six months. Also included are the eight components of Headline CPI and a separate entry for Energy, which is a collection of sub-indexes in Housing and Transportation. We can make some inferences about how inflation is impacting our personal expenses depending on our relative exposure to the individual components. Some of us have higher transportation costs, others medical costs, etc.
A conspicuous feature in the year-over-year table is the volatility in energy, significantly a result of gasoline prices, which is also reflected in Transportation.
Here is the same table as above with month-over-month numbers (not seasonally adjusted).
Note: For additional information on the component composition of the Consumer Price Index, see our Inside the Consumer Price Index.
Inflation: Fed's Target
In the wake of the Great Recession, 2% has been the Fed's target for core inflation. Although, the Fed traditionally uses the Personal Consumption Expenditure (PCE) price index as their preferred inflation gauge. In August 2020, Fed Chairman Jerome Powell introduced a policy that not only allows for a level above 2% but welcomes it.
"In order to anchor longer-term inflation expectations at this level, the Committee seeks to achieve inflation that averages 2 percent over time, and therefore judges that, following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time." See Statement on Longer-Run Goals and Monetary Policy Strategy update (revised January 2021).
The COVID-19 pandemic helped launch inflation into its highest levels since the 1980s. As a result, the Fed has been battling high inflation over the past few years with its monetary policy. Inflation has eased off of its 2022 highs, however the back half of 2024 has shown just how sticky it can be.
For a closer look at the two main measures of inflation and how they stack up against each other, check out the video below.
Note: data is through January 2024.
