CPI Report Disappoints

Stocks drifted lower this morning after the Bureau of Labor Statistics released inflation data for December. Headlines are calling the report “hotter” than expected. The Dow is currently off about 100 points and the S&P 500 is down .4%. Bonds are trading modestly lower as well. The interest yield on the 10-year Treasury Note ticked back above 4%.

The Consumer Price Index (CPI) picked up .3% in December compared with the prior month. That’s slightly higher than both November’s gain, and what economists expected. Compared with a year ago, CPI accelerated to 3.4% from 3.1%. Today’s palpable disappointment among investors stems from the desire to see inflation move steadily lower, month by month. That expectation is obviously unrealistic.

Nevertheless, the broad trend for inflation is still lower. Core CPI, which strips out the more volatile food & energy categories, decelerated to an annualized rate of 3.9% from 4.0%. That’s the lowest rate since May 2021. In addition, let’s remember that CPI’s weirdly contrived estimate of housing costs is driving about half of the inflation we’re seeing in the CPI. We know that will come down over the course of 2024 just due to a lagged effect.

The main reason this report dented stock & bond markets today is that traders have placed bets that the Federal Reserve will likely begin cutting interest rates in March. Here again, that expectation is obviously unrealistic. Inflation isn’t falling fast enough, and the economy isn’t deteriorating enough, to force the Fed’s hand. I think Ritholtz Wealth Management’s Josh Brown drew the right conclusion about the CPI report. “Directionally, it’s not what we were looking for,” but investors need to remain focused on the “the bigger trend” rather than “the headline this morning.”