But Still Elevated
- The consumer price index rose 0.5% in December, a slowing from October and November.
- The core CPI also rose 0.5% in December, near its recent pace.
- On a year-ago basis overall CPI inflation was 7.0%, the fastest pace since 1982.
- Year-over-year core inflation was 5.5% in December, also the fastest pace since 1982.
- Inflation is set to slow in 2022 but will remain higher than the Fed would like. The central bank is set to raise the federal funds rate four times in 2022.
The consumer price index rose 0.5% in December, slightly faster than the consensus expectation for a 0.4% increase. This was a slowing from increases of 0.8% in November and 0.9% in October. On a year-ago basis, the overall CPI was up 7.0% in December, the fastest pace since 1982. Year-over-year inflation was 6.9% in November.
The core CPI index, excluding volatile food and energy prices, rose 0.6% in December, after increases of 0.5% in November and 0.6% in October. On a year-ago basis, the core CPI was up 5.5% in December, also the fastest pace since 1982. Core inflation was 5.0% year-over-year in November.
Energy prices fell 0.4% in December, the first decline since April. Food prices rose 0.5% over the month. Vehicle prices remain a significant contributor to higher inflation, with new vehicles prices up 1.0%, and used vehicle prices up 3.5%. Housing costs were up 0.4%, close to the recent pace.
Inflation remained elevated in late 2021 but is set to slow in 2022. Some of the increase in inflation, particularly on a year-over-year basis, is due to comparisons with 2020, when prices were weak coming out of the pandemic. And some of the increase has come from a few goods and services-autos, airfares, energy-where supply has not caught up with demand as the economy as reopened. As a result inflation is likely to peak on a year-ago basis in early 2022.
But prices are increasing broadly throughout the economy, and the Federal Reserve has been caught off-guard by the extent of inflation. Inflation will slow in 2022 as supply chains reopen and prices for some items, like vehicles and energy, decline as supply catches up to demand. But inflation for many other goods and services will be higher in 2022 than before the pandemic, due to higher labor costs and input prices. Housing will also contribute to high inflation in 2022.
The CPI is set to slow over the course of 2022, with the core index ending this year up around 3%. This is higher than the Federal Reserve would like-the central bank has an inflation objective of 2%, using a different measure, the personal consumption expenditures price index, which tends to run a bit below the CPI. As a result, PNC expects the Fed to raise the federal funds rate four times this year, starting in May, in an attempt to cool off growth and reduce inflationary pressures in the economy.
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