Last week the inflation numbers for the month of December were released, and the news was positive. JP Morgan, one of the Portfolio Strategists we utilize for client accounts, wrote this about the inflation numbers in their Weekly Market Recap…
While the story last year was about inflation peaking, the 2023 narrative is shifting toward how quickly inflation can cool, and furthermore, how much cooling will be sufficient to get the Fed to pause its rate-hiking campaign. Last week, December’s CPI came close to expectations, and marked the sixth consecutive decline in the headline CPI on a year over-year basis and the first monthly decline since June 2020. Core CPI on the other hand, which peaked three months after the headline figure, registered an increase of 0.3% month over month.
Turning to the details, energy prices declined by 4.5% relative to November, and there was also a moderation in food price increases to 0.3%month over month. Core goods, helped by abating supply chain bottlenecks, declined by 0.3%. On the other hand, core services came in firm at 0.5%, but were
largely boosted by shelter prices (0.8%m/m), which are expected to reflect recent moderation in the rental market with some lag. As such, the Fed will continue to closely watch core services inflation ex-shelter, given its relation to the labor market and still strong demand for services.
The Fed is likely to welcome this much-awaited progress on inflation by slowing the pace of rate hikes in February. However, the Fed will want to see further evidence that inflation is cooling, especially in services, before it will feel comfortable taking a pause. Looking further out, this report confirms that the inflation surge is ebbing; barring any shock, this cooling inflation environment should lead to a more symmetric approach to monetary policy as the year progresses, which will likely be positive for both stocks and bonds.