Inflation remains stubbornly above Fed's target

Inflation is still stubbornly above the Federal Reserve’s 2% target, as shown by the consumer price index for December, which was released by the Bureau of Labor Statistics on Tuesday morning. Overall inflation was up 0.3% from November to December; it rose 2.7% from the same time last year.

Core inflation, which excludes volatile food and energy prices, increased 0.2% in December.

Distortions from the government shutdown appeared to filter into the December CPI. Federal agencies didn’t reopen until the middle of November, which meant government workers were out checking prices just as holiday discounts were hitting stores. That likely led to an understating of goods inflation in November and leading to a bounce back in December prices.  

Markets were mildly pleased about this Tuesday morning, according to Jeffrey Cleveland, chief economist at Payden and Rygel. The reason?

“I think that keeps the dream alive for rate cuts. The Federal Reserve, the central bank, is waiting for inflation to continue to moderate,” he said. “There were some fears that inflation would be a little bit hotter in December after a pretty soft November report, so the fact that it came in softer than expected is overall good news.”

Assumptions made by the Bureau of Labor Statistics about shelter costs during the shutdown kept the cost of rent artificially low. That’s expected to correct itself this year. The cost of tariffs could also continue to be passed on to consumers throughout the new year.

Another area of note in the report was the price of food, which was up 0.7% in December — both for food at home and away from home.

“That's a big rise in the index,” Cleveland said. “So food, I think, is one area for the average person listening to this, they're not going to be comforted by core CPI being softer. They're going to look at food and say, ‘Hey, no, this is a problem.’”