The beginning of the end of inflation?

CPI: Three little letters that can make or break your portfolio. Thankfully, the Consumer Price Index was feeling lenient and decided to deliver some surprisingly solid inflation information today.

CPI measures the monthly and annual price change for consumer goods, which is a big basket of stuff—everything from cars to clothes, utilities to doctor’s visits. This broad measure of inflation actually wasn’t great: CPI rose 0.4% in December, higher than the 0.3% analysts anticipated, keeping the annual inflation rate at 2.9%.

But the market had its best day since last November because core CPI came in lower than analysts expected. Core CPI cuts out food and energy prices, which can be volatile—just look at how the colder-than-expected January weather jacked up natural gas prices. The Federal Reserve prefers to look at the core measure of inflation because it gives a better picture of trends without being yanked around by temporary issues.

Core CPI rose 0.2% month over month, below Wall Street’s 0.3% forecast, and rose to 3.2% annually, also under the 3.3% increase that the pros expected.

Here’s a quick breakdown of some key portions of the December CPI report:

• Energy prices like gas and electricity rose 2.6% month over month, a huge increase from November’s 0.2% due largely to a big jump in oil prices.
• The cost of food purchased for at-home consumption (aka groceries) rose 0.3% month over month—down from 0.5% in November. But the price of some specific foods like eggs popped 3.2% month-over-month thanks to an outbreak of avian flu.
• Shelter costs rose 0.3% in December, flat month over month and up 4.6% annually—the smallest yearly increase since January 2022, which is a great sign for homebuyers and the economy alike.

Good news is good news again

Investors can’t make up their minds: One day they decide that a surprisingly strong jobs report means that the Fed won’t cut rates in 2025 and they sell out of stocks, the next day they decide that a surprisingly strong CPI report means that it doesn’t matter if the Fed doesn’t cut rates and they buy all the stocks.

Today’s CPI slowdown is undoubtedly good news, though not as good as markets would have you believe. Wall Street pros are warning this isn’t the end of inflation, just a sign that it’s staying steady. Most analysts believe inflation will continue to hover around 2.9% through the rest of the year, and while that means the Fed will likely slow down its rate cutting in 2025, today’s report means that interest rate hikes are off the table again—for now.—MR