What Does December’s Consumer Price Index Report Mean For You? Experts Weigh In

Mohammed Haneefa Nizamudeen / Getty Images/iStockphoto

The first Consumer Price Index (CPI) release of the year showed that inflation is continuing to ease for the sixth consecutive month — an enormous sigh of relief for both consumers and investors, dropping to 6.5% in December. This is the smallest 12-month increase since the period ending October 2021.

Learn: 10 Things To Stop Buying in 2023
Discover: How To Invest In Precious Metals To Protect Your Retirement
SNAP Benefits: How Long Do They Last?

This figure also represents a 0.1% decrease for the month, largely driven by falling gasoline prices, the Bureau of Labor Statistics (BLS) said in the Jan. 12 announcement.

The data was in line with estimates, as economists expected inflation to fall 0.1% in December, to increase at an annual pace of 6.5%, according to Dow Jones. They estimated that core CPI — which excludes food and energy — to rise 0.3% during the same period, or 5.7% on an annual rate.

Now, the question remains, however, whether the latest CPI data might give the Federal Reserve reason enough to ease its pace of rate hikes.

“While large decreases in gasoline prices are more than welcomed, areas like food, shelter, and medical care saw further month-over-month price increases in December,” said Ben Vaske, investment research analyst at Orion Advisor Solutions. “Investors should still be wary to expect a Fed pivot at this point. Consumers will continue to feel the effects of higher-than-average inflation for the near future, but we are starting to see a glimpse of better days on the horizon.”

Make Your Money Work for You

The sentiment is echoed by several experts, who say that this modest cooling down of still-too-hot inflation should support the Fed’s projected terminal rate which is currently estimated at 5 to 5.25%.

We expect the Fed to raise rates by 25 bps in the next two meetings, giving the market a chance to digest the rate hikes of the past year,” said Mace McCain, President, Managing Director and CIO at Frost Investment Advisors.

Energy and Gas Index

In December, the energy index declined 4.5%, while the gasoline index declined a whopping 9.4%. Yet, over the past 12 months, the energy index increased 7.3%, while gasoline prices fell 1.5%.

Meanwhile, the index for natural gas increased 3% for the month.

“I hope the Fed focuses on the facts that if the price of crude oil comes down, and stays down, inflation and food prices will continue to ease over the next few months,” said John Catsimatidis, chairman and CEO of Red Apple Group — which owns and operates United Oil Refinery and 400 gas stations — as well as chairman and CEO of Gristedes & D’Agostino’s Supermarkets.

Make Your Money Work for You

“If we have positive steps, and oil prices decrease to $65 per barrel, inflation will come down substantially by the second or third quarter. We hope the Fed recognizes this before we destroy other industries in the country, and harm the economy further by creating a real recession. My recommendation to the Fed: at most, a quarter-point increase.”

Food Index

The overall food index increased by 0.3%, with the food at home index increasing 0.2% for the month, while the food away from home index rose 0.4%. Inflation rates on food have seen 11.8% over the last 12 months.

Food items that continued to see increases include meats, poultry, and fish, which rose 1%, while eggs rose an eye-popping 11.1%.

On the other hand, the index for dairy and related products decreased 0.3% in December, and the index for cereals and bakery products was unchanged. Prices for fruits and vegetables also fell  0.6% over the month with the fresh fruit index declining 1.9%.

Over the past 12 months, prices for cereals and bakery increased 16.1% while other food groups posted increases ranging from 7.7% -meats, poultry, fish, and eggs- to 15.3% -dairy and related products, the BLS said,

Make Your Money Work for You

In addition, the BLS said that the shelter index was the dominant factor in the monthly increase in the Core CPI, rising 0.8% in December — a 7.5% increase over the last year, accounting for more than half of the total Core CPI increase.

Additional indexes that increased include the household furnishings and operations index, with a 0.3% increase;  the index for motor vehicle insurance, which rose 0.6%,  the index for recreation, with a 0.2% increase; the apparel index, with 0.5% and the education index, which rose 0.3%.

What does it mean for consumers in 2023?

While the report was in line with expectations and demonstrates that inflation is cooling down, it is still a long way from what the Federal Reserve expressed it would like to see in order to finally pivot in its monetary policy.

“Consumers are surely noticing – and appreciating – the sharp decline in gas prices, but unfortunately, other key categories continue to get pricier. Grocery inflation is running close to 12% on an annual basis and housing costs are up 7.5% over the past year,” said Ted Rossman, senior industry analyst at Creditcards.com.  

Make Your Money Work for You

A key question moving forward is how aggressively the Fed continues to raise rates, according to Rossman.

“Investors’ best guess, according to the CME FedWatch tool, is for quarter-point increases in February and March. That would represent a slowdown from recent increases, although some argue the Fed has already gone too far with an aggressive series of rate hikes that totaled 4.25 percentage points in 2022.”

For example, Rossman said that among other things, that has pushed the average credit card rate to the highest point on record.

“It remains to be seen whether or not the Fed will be able to bring inflation down without tipping the economy into recession. That debate will be perhaps the biggest economic theme of 2023. Today’s report adds little clarity to the situation,” he said.

In other words, while today’s CPI was good it wasn’t great, as everyone knew gasoline would drag down prices, and it did, said David Russell, VP Market Intelligence at TradeStation Group.

 “The market was strongly anticipating a better inflation number so this doesn’t do much for either the bulls or bears. People hoping for an ‘all clear’ sign to buy stocks are still waiting. But the doom-and-gloom crowd can’t ignore a negative print. Jerome Powell isn’t going away yet. The waiting game continues, with attention now turning to corporate earnings,” he added.

More From GOBankingRates