This is the third straight month that inflation rates have increased.
The December Consumer Price Index (CPI) was a mixed bag, as the inflation rate moved higher last month, but core inflation decreased slightly.
For the month of December, the inflation rate increased 0.4%, slightly higher than expectations of 0.3%. The monthly increase was the highest since March.
Over the past 12 months, the inflation rate rose to 2.9%, up from 2.7% in November.
This is the third straight month that CPI inflation has risen, after reaching a recent low of 2.4% in September. At 2.9%, the inflation rate is the highest it has been since July.
Core inflation moves lower
The primary culprit for the inflation increase was a rise in energy costs, which jumped 2.6% for December after rising just 0.2% in November. Energy commodities – which are gas and oil – increased 4.3% after rising just 0.5% in November.
While overall inflation rose, core inflation, which excludes more volatile food and energy costs, fell in December.
The core CPI increased 0.2% in December, which was better than the 0.3% rise that had been estimated. Core CPI over the past 12 months rose 3.2% in December, which was also lower than the expected 3.3% rate. It is the first time that the core CPI has decreased since July.
Indexes that increased in December include shelter, airline fares, used cars and trucks, new vehicles, motor vehicle insurance, and medical care. Among the indexes that decreased last month were personal care, communication, and alcoholic beverages.
Over the past 12 months, the biggest decliner remains fuel oil, despite the December jump. Prices for oil are down 13.1%. Gasoline prices are down 3.4% while used cars and truck prices are 3.3% lower.
The highest price gains remain within transportation services, which are up 7.3% over the past 12 months. Shelter is next with prices up 4.6%, while food away from home costs have risen 3.6%.
The CPI numbers come one day after the Producers Price Index (PPI), which gauges prices businesses and producers set for their goods and services. The December PPI came in at 3.3%, which was lower than the 3.4% that was anticipated, but up from 3.0% in November.
Market reaction
Stocks were moving higher on Wednesday after the opening bell, which suggests that investors took the core CPI surprise as a positive. The Nasdaq was up 332 points or 1.7%, while the Dow Jones climbed 636 points or 1.5%. The S&P 500 was up 84 points or 1.4% while the Russell 2000 jumped 25 points or 1.1%.
The market may have also been lifted by strong earnings reports from banks and asset managers on Wednesday, namely BlackRock (NYSE:BLK) and JPMorgan Chase (NYSE:JPM).
The CPI report was mostly in line with Vanguard’s expectations.
“We anticipate a 0.26% month-over-month rise in core CPI, 3.3% year-over-year, and a 0.36% increase in headline CPI, 2.9% year-over-year, driven by strong food and energy prices,” Jeremy Eisengrein, Vanguard spokesman, said. “Goods prices will likely see a modest increase, easing from November, while services ex-shelter prices are expected to rise but weaken slightly. Shelter prices are forecast to rise but moderate, with lodging away from home cooling down. Leading rental indicators point to further moderation in shelter prices, though trade and immigration policy changes could delay this trend.”
The inflation report did not change sentiment among interest rate traders, according to CME’s FedWatch gauge. Some 97.3% expect no change in interest rates at the next FOMC meeting, while just 2.7% expect the Fed to drop rates by 25 basis points. The day prior, 97.9% expected rates to stay the same while 2.1% projected a 25-basis point cut.