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 ¼ 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.
Click here for PDF version