Highest Rent Inflation Since 2007 Sends Core CPI Above Fed's Target For 14th Consecutive Month

US headline inflation rose for a 5th consecutive month, and has not seen a negative print since February, following today's report that CPI in December rose 0.3%, and up 2.1% from a year ago, the highest since June 2014. Both measures came in line with expectations as energy and gas costs rise and rents and medical costs continued to rise.

Energy costs increased 1.5% from a month earlier, as gasoline rose 3%. Food prices were unchanged for a sixth month, however thiw as more than offset by shelter expenses which climbed 0.3%, reflecting a jump in rental costs.

As shown below, rent inflation rose 4.0% in December, the highest annual increase since December 2007, pushing shelter inflation up 3.6% Y/Y.

The core CPI measure increased 2.2 percent from December 2015, after rising 2.1 percent in the prior 12-month period.  Core inflation has now printed above the Fed's target rate of 2.0% for 14 consecutive months.

Continued rising prices should further boost inflation and strengthening the case for the Fed to keep raising interest rates this year, although the Fed’s preferred gauge of inflation, the personal consumption expenditures price measure, which puts a lower emphasis on rents, rose only 1.4% in November from a year earlier; it hasn’t matched the central bank’s 2 percent goal since April

“Consumer prices have trekked higher over the past few months on the back of higher energy prices,” Sam Bullard, senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said in a note before the report. The Fed is “well-positioned for multiple rate hikes in 2017” with inflation near target and unemployment below 5 percent, he wrote.

Some more details on core prices:

The index for all items less food and energy increased 0.2 percent in December. The shelter index rose 0.3 percent in December, the same increase as in November, with the indexes for rent and owners' equivalent rent both repeating their November increases of 0.3 percent. The index for motor vehicle insurance rose 0.8 percent in December following a 1.0 percent rise the prior month. The medical care index, which was unchanged in October and November, rose 0.2 percent in December. The hospital services index rose 0.3 percent, and the index for prescription drugs increased 0.2 percent.

 

The education index also increased in December, rising 0.5 percent. The index for airline fares increased 1.9 percent after declining in November. The index for used cars and trucks rose 0.5 percent, its largest increase since April 2015. The index for new vehicles increased slightly, rising 0.1 percent after falling 0.1 percent in November. Also increasing in December were the indexes for tobacco (0.4 percent), personal care (0.3 percent), household furnishings and operations (0.1 percent), and alcoholic beverages (0.1 percent).

 

The recreation index was unchanged in December. The apparel index, which fell 0.5 percent in November, declined 0.7 percent in December. The communication index also fell in December, decreasing 0.1 percent.

In short, prices continue to rise and will only accelerate should any of Trump's proposed fiscal measures be implemented.