CPI inflation fell faster than expected in December. But core inflation, excluding food and energy, only slowed as expected amid stubborn service inflation. The S&P 500 edged higher on Thursday afternoon. stock market behavior After the release of the consumer price index.
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CPI inflation eased to 6.5% from the previous month’s 7.1%, versus Wall Street’s forecast of 6.6%. The consumer price index fell 0.1%, compared to an expected flat figure.
As expected, core CPI rose 0.3% over November levels. Core inflation eased to 5.7% from 6% for the year. Core CPI inflation peaked at his 40-year high of 6.6% in September.
Also on Thursday, the Labor Department also reported that new claims for unemployment benefits fell from 1,000 to 205,000 in the week ending Jan. 7.
The Fed will likely continue to cut the pace of rate hikes to just a quarter of a percentage point in its next policy decision on Feb 1st. jumped to 93% After CPI, up from 77% the day before.
After that, how much the Fed continues to raise rates will depend more on the CPI than on wage growth, which is key to the service sector inflation outlook. The good news for the market that triggered the latest S&P 500 rally attempt was a surprising slowdown in wage growth in December.
S&P 500 reaction to CPI report
Despite the falling odds of another big rate hike, the S&P 500 initially oscillated between modest gains and losses before gently reversing in the afternoon. The S&P 500 rose 0.2% around 1:30 pm ET. The Dow Jones Industrial Average rose 0.5% and the Nasdaq Composite rose 0.2%.
Meanwhile, the 10-year Treasury yield fell 10 basis points to 3.45%, nearing its lowest level since September.
The latest S&P 500 rally from mid-October lows delivered a shock of energy on January 6th. Unexpectedly subdued wage inflation data has raised hopes that the Fed can cut back on rate hikes before collapsing the economy.
The gains sparked by the jobs report pushed the S&P 500 to within 0.4% of its 200-day moving average. The past few rally attempts have dipped at that level, but this time it may have some foothold.
The S&P 500 closed 13.7% above the intraday bear market low on Oct. 13, but 17.6% below its all-time high.
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Fed Chair Powell shifts focus from CPI to wages
If the CPI falls further, the S&P 500 could continue to rise, but it is not a catalyst.
Wage growth is key to the Fed’s policy outlook, so investors should December job report It showed a sharp downshift in Q4. Average hourly wages were up 4.6% from a year ago, below projections of 5%, fueling the current S&P 500 rally. Wage growth has now fallen to its lowest level since August 2021, down 1 percentage point from its peak in March.
Wages increased 4% annualized in the fourth quarter, and wage growth appears to be moving closer to Fed Chairman Jerome Powell’s target of 3.5%. Given productivity growth of about 1.5%, wage growth of 3.5% could bring inflation in line with the Fed’s 2% target.
The most important inflation rate going forward is Personal Consumption Expenditure (PCE) services minus energy and housingsays Powell. Core commodity price inflation is declining, and given that market rents are stalling, so could housing inflation in 2023. However, non-energy service inflation, excluding housing, is likely to continue rising as long as wages continue to rise.
service inflation trend
The S&P 500 was initially shaken after a CPI report showed inflation in non-energy service prices, which affects 56% of consumer budgets, had not yet started to subside. Core services prices were up 0.5% month-on-month and 7% year-on-year, up from 6.8% in November.
However, this is partly due to how the Department of Labor calculates housing inflation. New rental housing prices have been dropping for several months, but it will take about a year for that to be fully reflected in renewed leases and CPI.
Some analysts highlighted a 7.4% year-on-year rise in service prices, excluding shelter. However, that category includes prices for energy services, up 15.6% from a year ago. Excluding energy and shelter, service prices are up about 6.2% from his year ago.
To better understand how the CPI data compares to Powell’s data, which focuses on PCE core services minus housing, IBD made some changes. The only addition was the dining away from home part of the PCE service department. It deducts the owner’s equivalent rent, primary residence rent, and health insurance, which are not reflected in the PCE inflation data.
The latest data look largely positive. Prices for this set of core services were up 6.5% from a year ago, but the three-month annual trend improved to 5% from 6.5% in November and 7.1% in October.
Meanwhile, commodity price inflation, excluding food and energy, has slowed from double-digit gains at the beginning of the year. That progress he continued in December. Prices of core commodities fell 0.3% he in March. That lifted year-on-year inflation to 2.1% from his 3.7% in November.
Consumer Price Index report details
Used car and truck prices fell 2.5% month-on-month and are now down 8.8% year-on-year. New car prices fell he 0.1% from November, but year-on-year price gains eased to 5.9% from he 7.2% the previous month.
Energy prices fell 4.5% over the month, but annual gains eased to 7.3% from 13.1% in November.
Food prices rose 0.3% in the month as the annual rate of increase slowed from 10.6% to 10.4%.
Primary resident rents and owner equivalent rents rose 8.3% and 7.5% year-on-year, respectively. Both were up 0.8% for the month.
Transport service prices rose 0.2% m/m and 14.6% y/y.
Prices for medical services rose 0.1% in the same month after falling 0.7% and 0.6% in the previous two months. This brings the annual growth rate to his 4.1%.
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