The Consumer Price Index Increased 0.3% in December To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
The Consumer Price Index (CPI) increased 0.3% in December, matching consensus expectations. The CPI is up 2.1% from a year ago.
"Cash" inflation (which excludes the government's estimate of what homeowners would charge themselves for rent) rose 0.3% in December and is up 1.7% in the past year.
Energy prices rose 1.5% in December, while food prices were unchanged. The "core" CPI, which excludes food and energy, increased 0.2% in December, matching consensus expectations. Core prices are up 2.2% versus a year ago.
Real average hourly earnings the cash earnings of all workers, adjusted for inflation rose 0.1% in December and are up 0.8% in the past year. Real average weekly earnings are up 0.2% in the past year.
Implications: A fitting reading on consumer prices for the final month of 2016, as December's 0.3% rise in prices pushed the twelve-month increase above the Fed's 2.0% target for the first time in more than two years. That is a significant pickup from the 0.7% increase we saw in 2015, and we expect 2017 will continue to see prices move gradually higher. Year-to-year prices have been steadily on the rise over recent months as energy prices, up 1.5% in December and rising at a 27.4% annual rate in the past three months, have turned into a tailwind after serving as a headwind for much of the past two-and-a-half years. Energy prices will likely average at modestly higher prices than 2016, but even stripping out energy and food prices the latter of which have now been unchanged for six consecutive months shows inflation up 2.2% in the past year, just a tad higher than the 2.1% gain in 2015. The "core" measure was once again led higher by housing prices in December. Owners' equivalent rent, which makes up about ΒΌ of the CPI, rose 0.3% in December, is up 3.6% in the past year the largest annual rise going back to 2007 - and will be a key source of higher inflation in the year ahead. On the earnings front, today's report shows real average hourly earnings rising 0.1% in December. Real earnings rose a modest 0.8% in 2016, a slower pace than the 1.9% gain in 2015, but given continued employment gains this should move higher over the next year. With prices - both including and excluding food & energy costs rising at or above the Fed's 2% target and continuing a steady climb higher, paired with continued strength in employment, we expect the Fed to raise rates three (and possibly four) times in 2017.