The Sixth Straight Decline

Today’s data was not only a surprise because inflation continued its downward trend. But also because the analysts nailed the numbers. Talk about a rare occurrence. ๐Ÿคฏ

Anyway, let’s get into today’s consumer price index (CPI) print, Biden’s talking points, and the market’s reaction.

First, the headline consumer price index declined 0.1% MoM. While it still rose 6.5% YoY, December was its smallest annual increase since October 2021. ๐Ÿ‘

Core consumer prices, which exclude food and energy due to their volatility, rose 0.3% MoM and 5.7% YoY.ย 

Driving the overall decline was a sharp decline in energy prices, with food prices also backing off their hottest pace. Used vehicle prices continue to fall, down 2.5% MoM and 8.8% YoY.

Recent inflation reports have suggested that goods inflation has turned a corner and is trending down for most items. Today’s data supports that narrative. However, services inflation remains sticky, which faces upward pressures from the historically-strong labor market. ๐Ÿฅต

The market seems to be looking past the shelter component of services inflation even though it accelerated to +0.8% MoM and 7.5% YoY. Most leading indicators suggest that shelter prices are coming down, but the CPI’s methodology includes a significant lag in its data, so it’s not a great reflection of reality.

What remains concerning is the other components of service inflation that don’t appear to be budging. And the Fed fears that this won’t change until the labor market softens materially. ๐Ÿง‘โ€๐Ÿ’ผ

Overall, the market is taking today’s inflation data in stride. Inflation remains too high but continues to trend in the right direction. And that gives the market hope that the Fed can pivot to a softer approach sooner rather than later. Plus, it helps that some Fed members like Harker are coming out in support of 25 bp rate hikes in the future.

Meanwhile, the Biden administration used today’s news to reiterate that his economic policies are working. Additionally, he pushed back on republicans’ tax plans, saying they would make inflation worse.ย 

Lastly, given a good portion of the decline in inflation came from energy, we best keep our eyes on crude oil prices. ๐Ÿ‘€

While most are focused on the rallies elsewhere, the oil services ETF ($OIH) quietly pushed to 3.5-year highs. Traders often consider this industry-ETF as a leading indicator for the broader sector and energy commodities as a group.

If they’re right, we could see higher oil prices (and inflation pressures) ahead. We’ll just have to wait and see. ๐Ÿคท

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