CPI Inflation Rate Shows Progress in Service Prices; The S&P 500 is rising


The CPI inflation rate fell faster than expected in December. However, core inflation, which excludes food and energy, moderated only in line with forecasts on the back of stubborn service inflation. The S&P 500 was moderately higher Thursday afternoon stock market movement after the release of the consumer price index.




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

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

On Thursday, the Labor Department also reported that new claims for jobless benefits fell by 1,000 to 205,000 in the week to Jan. 7, indicating that layoffs have yet to increase broadly.

The Fed is expected to continue to cut interest rates by just a quarter point with its next policy move on February 1. The odds of a Fed rate hike of just 25 basis points rose to 93% after the CPI. 77% from the previous day.

How much the Fed continues to hike next will depend less on CPI than on wage growth, which is key to service-sector inflation forecasts. The good news for markets that fueled the latest S&P 500 rally attempt is that wage growth showed a surprising slowdown in December.

Reaction to the S&P 500 CPI Report

The S&P 500 initially traded between modest gains and losses before turning modestly lower in the afternoon, despite the prospect of another big rate hike falling. The S&P 500 was up 0.5% at 1:45 p.m. ET. The Dow Jones Industrial Average rose 0.7%, and the Nasdaq Composite rose 0.6%.

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

The S&P 500’s latest rally off mid-October lows got a jolt of energy on Jan. 6, when unexpectedly subdued wage inflation data raised hopes that the Fed could halt interest rate hikes before they cripple the economy.

A rally sparked by the jobs report lifted the S&P 500 within 0.4% of its 200-day moving average. The last few rally attempts have fizzled out at this level, but this one may have some legs.

The S&P 500 finished up 13.7% from its intraday low on Wednesday, Oct. 13, but remained 17.6% below its all-time high close.

Be sure to read IBD’s The Big Picture daily to stay in sync with market direction and what it means for your trading decisions.

Fed’s Powell Shifts Focus from CPI to Wages

A further decline in the CPI inflation rate could allow the S&P 500 to move higher, but it would not be a catalyst.

Wage growth has become key to the Fed’s policy outlook, so investors took note after the December jobs report showed a sharp decline in Q4. Average hourly wages rose 4.6% from a year ago, below forecasts of 5%, kicking off the current S&P 500 rally. Wage growth slipped a full percentage point from its peak in March to the lowest level since August 2021.

With wages rising at a 4% annual rate in Q4, wage growth is nearing Fed Chair Jerome Powell’s 3.5% target. Given about 1.5% productivity growth, a 3.5% wage increase could bring inflation in line with the Fed’s 2% target.

Powell says the most important level of inflation going forward is personal consumption expenditure (PCE) services minus energy and housing costs. Core commodity price inflation is easing and the same could be true for housing inflation in 2023, given the stagnation of market rents. But excluding housing, inflation in non-energy services will remain high as wage growth remains tepid.

Inflationary Trend in Services

The S&P 500 initially faltered after the CPI report showed that inflation in non-energy services, which affects 56% of consumer budgets, has yet to begin to abate. Prices of basic services increased by 0.5% per month and by 7% a year ago. 6.8% in November.

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

Some analysts pointed out that the prices of services, excluding shelters, increased by 7.4% compared to a year ago. However, this category includes the prices of energy services, which rose by 15.6% compared to a year ago. Excluding energy and shelter, prices for services rose by about 6.2% from a year ago.

To get a better idea of ​​how CPI core services inflation data compares to Powell’s focus on PCE core services negative housing, IBD made a few changes. Dining away from home, part of the PCE services sector, was the only addition. Owner’s equivalent rent, principal residence rent and health insurance not included in PCE inflation data are deducted.

The latest data seems generally positive. While prices of these basic services rose 6.5% from a year ago, the 3-month annual trend rose to 5% from 6.5% in November and 7.1% in October.

At the same time, inflation in commodity prices, excluding food and energy products, has slowed from double-digit growth at the beginning of the year. This progress continued in December. Prices of basic goods decreased by 0.3% per month. This increased annual inflation to 2.1% from 3.7% in November.

CPI Inflation Report Details

Prices for used cars and trucks fell 2.5% on the month and are now 8.8% lower than a year ago. New car prices fell 0.1% from November, and annual price growth slowed to 5.9% from 7.2% in the previous month.

Energy prices fell 4.5% on the month, and annual growth slowed to 7.3% from 13.1% in November.

Food prices rose 0.3% month-on-month as annual growth eased to 10.4% from 10.6%.

The equivalent rent of one’s main occupant and owner increased by 8.3% and 7.5% respectively from a year ago. Both rose 0.8% on the month.

Prices of transport services increased by 0.2% per month, and by 14.6% year-on-year.

Prices for medical services rose 0.1% on the month after falling 0.7% and 0.6% in the previous two months. This kept annual growth at 4.1%.

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