The BLS announced that the CPI rose 4.82% on an annualized, seasonally adjusted basis, the highest reading since last February, and an increase of a full percentage point compared to November. The year over year reading increased from 2.73% to 2.90% and our preferred trend measure increased from 2.81% to 3.48%. The surge, however, came largely from energy commodities (fuel oil and gasoline) rising 4.3% over the month, 66.5% annualized!! The extreme volatility of energy and food is the main reason the BLS also reports the CPI ex food and energy, likely a better measure of underlying inflation.
The CPI core measure (ex food and energy) plunged from an annualized 3.76% in November to 2.73% in December. The year over year number fell from 3.30% to 3.25% and our trend measure fell from 3.37% to 3.16%.
The following graph shows the extreme volatility of energy prices, often rising or falling 50% or more in a month. Food prices are also volatile, but no where near that of energy.
PCE inflation for December will be available in just over two weeks. Given the overlap in the goods and services in the CPI and PCE deflator, the CPI provides a useful signal of the likely direction for PCE inflation. Clearly, the signal from this CPI report is mixed: Overall CPI inflation rose between November and December while core CPI inflation fell. Since the policymakers on the FOMC focus on core inflation measures, perhaps the CPI report is good news: we may be in for a moderate decline in core PCE inflation. Stay tuned.
