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CPI Inflation Rate Slides as Services Prices Show Progress; S&P 500 rises

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The CPI inflation rate fell faster than expected in December. However, core inflation, which excludes food and energy, only slowed in line with projections amid persistent services inflation. The S&P 500 rose moderately on Thursday afternoon stock market action following the release of the consumer price index.


The CPI inflation rate fell to 6.5% from 7.1% the previous month against Wall Street expectations of 6.6%. The consumer price index fell 0.1% on the month against the expected stable reading.

Core CPI rose 0.3% from November levels, as expected. Core annual inflation fell from 6% to 5.7%. The core CPI inflation rate reached a 40-year high of 6.6% in September.

Also on Thursday, the Labor Department also reported that new jobless claims dropped from 1,000 to 205,000 for the week ended Jan. 7, suggesting that layoffs have not yet broadened.

The Fed is likely to continue slowing the pace of rate hikes to just a quarter of a point with its next monetary policy change on Feb. 1. from 77% the day before.

How far the Fed continues to hike after that will depend less on the CPI than on wage growth, which is key to the service sector’s inflation outlook. The good news for markets that triggered the S&P 500’s latest rally attempt is that wage growth showed a surprising slowdown in December.

S&P 500 reaction to CPI report

Despite the downside chances of another big rate hike, the S&P 500 initially fluctuated between modest gains and losses, before turning modestly in the afternoon. The S&P 500 was up 0.5% around 1:45 pm ET. The Dow Jones Industrial Average was up 0.7% and the Nasdaq composite 0.6%.

Meanwhile, the 10-year Treasury yield fell 10 basis points to 3.45%, approaching its lowest level since September.

The S&P 500’s last rally after the mid-October lows received an energy jolt on Jan. 6, when unexpectedly subdued wage inflation data raised hopes that the Fed could cut interest rate hikes before they bring the economy down.

The rally triggered by the jobs report sent the S&P 500 up 0.4% from its 200-day moving average. The last two rally attempts have failed at this level, but this one could have some legs.

The S&P 500 finished 13.7% above the intraday low of the Oct. 13 bear market on Wednesday, but remained 17.6% below its all-time closing high.

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Fed’s Powell shifts CPI focus to wages

A further decline in the CPI inflation rate could allow the S&P 500 to continue rising, but it will not be the catalyst.

Wage growth has become key to the Fed’s policy outlook, so investors cheered after the December jobs report showed a sudden drop in the fourth quarter. Average hourly wages rose 4.6% year-on-year, below forecasts of 5%, kicking off the current S&P 500 rally. percentage from the March peak.

With wages growing at an annualized rate of 4% in the fourth quarter, wage growth appears to be pulling back closer to Fed Chairman Jerome Powell’s 3.5% target. Taking into account productivity growth of around 1.5%, 3.5% wage growth could bring inflation in line with the Fed’s 2% target.

The most important inflation rate going forward is personal consumption expenditure (PCE) services minus energy and housing, Powell says. Core property price inflation is easing and the same is likely for housing inflation in 2023 given the stagnation of market rents. But inflation in non-energy services, excluding housing, is likely to remain elevated as long as wage growth remains buoyant.

Service Inflation Trend

The S&P 500 initially faltered after the CPI report showed that non-energy service price inflation, which affects 56% of consumers’ budgets, has not yet begun to ease. Prices for basic services rose 0.5% in the month and 7% year-on-year, against 6.8% in November.

However, this is partly due to the way the Department of Labor calculates housing inflation. While new housing rental rates have been falling for months, it takes about a year for this to be fully reflected in renewed rents and the CPI.

Some analysts pointed out that prices for services excluding shelter increased by 7.4% year-on-year. However, this category includes prices for energy services, which increased by 15.6% year-on-year. Excluding energy and housing, service prices increased by around 6.2% year-on-year.

To get a better idea of ​​how the CPI’s basic services inflation data compares to Powell’s focus on PCE’s basic services minus housing, the IBD has made some changes. Food away from home, which is part of the PCE service sector, was the only addition. Owner equivalent rent, primary residence rent, and health insurance, which do not feed into the PCE inflation data, were subtracted.

The latest data looks generally positive. While prices for this batch of core services rose 6.5% year-on-year, the three-month annualized trend improved to 5% from 6.5% in November and 7.1% in October.

Meanwhile, inflation in commodity prices, excluding food and energy, slowed from double-digit increases at the start of the year. That progress continued into December. The prices of basic goods fell 0.3% in the month. That took year-on-year inflation to 2.1% from 3.7% in November.

CPI Inflation Report Details

Used car and truck prices fell 2.5% on the month and are now 8.8% below year-ago levels. New vehicle prices fell 0.1% from November, while the annual price increase moderated to 5.9% from 7.2% in the previous month.

Energy prices fell 4.5% on the month, while the year-on-year rise moderated to 7.3% from 13.1% in November.

Food prices rose 0.3% on the month, with the annual increase slowing to 10.4% from 10.6%.

Primary resident rent and owner-equivalent rent increased 8.3% and 7.5% year-over-year, respectively. Both were up 0.8% on the month.

Transport services prices rose 0.2% in the month and 14.6% year-on-year.

The prices of medical services rose 0.1% in the month, after falling 0.7% and 0.6% in the previous two months. That left the annual increase at 4.1%.


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