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The December Consumer Price Index (CPI) report almost exactly matched market expectations, which is unheard of in recent memory. Each of the four key metrics were just as advertised, which in this case, was not a bad outcome. Headline CPI fell 0.1% for the month and the core rate rose 0.3%. For perspective, minus 0.1% is the first negative reading since May 2020 and 0.3% is the second lowest monthly rise in over a year. Year-over-year CPI rose 6.5%, the sixth consecutive drop and slowest pace in more than a year, and core year-over-year CPI was up 5.7%, the third drop in a row and slowest in 12 months. In summary, inflation is well off the high marks reached last year and appears to be moving lower at a significant pace.
The improvement in inflation is coming mostly from the goods sector, while services prices still have a way to go. Goods prices declined for the third month in a row, as supply chain disruptions and warmer winter weather helped curb costs for consumers. Many of the supply disruptions that caused prices to spike last year have been resolved, which brings up the argument of whether the Federal Reserve was partially correct to say inflation was transitory. Used car prices fell 2.5%, while new car prices contracted for the first time in almost two years. Energy prices were down 4.5%, driven by a 9.4% drop in gasoline prices.
The Federal Reserve must contend with some remaining stickiness in consumer-based inflation. Food prices remain high; however, the biggest concern is services costs, primarily housing related. Shelter costs account for 40% of core CPI and continue to rise. The shelter component rose 0.8% in December and 7.5% from a year ago, both numbers the highest in at least six months. This is where the financial markets and the Federal Reserve differ on their current definition of high inflation.
Fed naysayers contend that the Fed is looking at old data. Real-time data, such as S&P Case-Shiller, Zillow and actual apartment listings, show prices have fallen and it is time to stop raising rates. As has been the case for the past nine months, the Federal Reserve continues to resist any suggestions for pivoting and cutting rates. The only hint the Fed may ease up on the gas pedal is recent comments from officials that a 25-basis-point increase may be adequate at the February Federal Open Market Committee (FOMC) meeting “if the data shows prices are slowing.” The question at hand is what data the voting officials are viewing.
Key Indicators this Week
Consumer Credit – Americans are increasingly relying on credit cards to cover daily expenses. U.S. consumer borrowing in November climbed above forecasts, as credit card balances increased the most in three months. Revolving credit outstanding, which includes credit cards, rose $16.5 billion.
Strategically for Credit Unions
If you are lucky enough to have liquidity, the question is becoming how to invest it. Shorter-term rates look more attractive than longer-dated maturities due to the curve inversion. As difficult as it may be to buy a bond or CD at a lower yield, this is exactly the time to build in protection for when interest rates stop moving higher. With hints that the Fed may be orchestrating smaller rate hikes, it is only a matter of time before they stop altogether. When that happens, your balance sheet will appreciate still earning above 4% when rates may be below that level. It is time to embrace curve inversion rather than fear it.
Sarina Freedland – Senior Investment Officer
Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. This is for informational purposed only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.
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