Inflation saw another small rise in December, continuing the 0.1% rise seen in November. Following the two recent consecutive pauses in rate hikes from the Fed, economists feel that this reading reflects the Fed’s sentiments that interest rates will not see any decreases soon.

The Consumer Price Index saw a 0.3% increase in its December reading. Over the last 12 months, the index increased 3.4% before seasonal adjustment.

The index for shelter continued to rise, making up more than half of the increase in all items this month. The energy index rose 0.4% over the month, as increases in the gasoline and electric indexes offset a decrease in the natural gas index. The food index increased 0.2%, the same rate as November. The index for food at home increased 0.1% over the month, and the index for food away from home rose 0.3%.

The index for all items less food and energy—also known as core inflation—rose 0.3%, the same rate as last month. Indexes that increased in December include shelter, motor vehicle insurance and medical care. Meanwhile, the index for household furnishings and operations, and the index for personal care saw decreases.

The all items index rose 3.4% for the 12 months ending December, up from the 3.1% seen for the 12 months ending November. The all items less food and energy index rose 3.9% over the last 12 months, slightly down from the 4% reported last month. The energy index decreased 2% over the last 12 months, and the food index increased 2.7% over the last year.

“The Consumer Price Index (CPI) was 0.3% in December, pushing the annual inflation rate up to 3.4%, its highest reading since the 3.7% pace observed in September,” commented® Chief Economist Danielle Hale. “Shelter inflation—costs for housing and rent driven by home price and rental trends—continue to be a major factor, and energy price trends reversed their recent declines in December. Perhaps more importantly for detecting underlying inflation pressures, ‘core’ inflation—a measure which strips out volatile food and energy prices—fell further, to 3.9% from 4% in November, and the monthly rate of change held steady at 0.3%.

“In the December Fed meeting statement, the Federal Open Market Committee members explicitly acknowledged improvement in inflation over the past 12 months, while also noting that it remains above target. Today’s inflation data highlight that progress may not be seen every month, and combined with the resilience in the labor market seen in December’s 3.7% unemployment rate, cuts in the Fed’s policy rate may not be warranted as soon as the market currently expects. Prior to the CPI reading, futures pricing suggested that a majority of investors expect a lower Fed funds rate at the March meeting,” Hale continued. “For the housing market, this means that the significant decline in mortgage rates observed since October may have gotten ahead of the data. In fact, mortgage rates have already steadied and are likely to increase further in today’s reading from Freddie Mac, which will be out later, but doesn’t yet price in today’s inflation report, which could mean even higher rates.”

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