Implications: Consumer prices rose 0.1% in December, ending 2017 up 2.1% for the year, exactly the same as the increase seen in 2016. However, in the past three months CPI is up at a 2.6% annual rate, signaling that inflation is accelerating further above the Fed's 2% target. A look at the details of today's report shows energy prices declined 1.2% in December, tempering increased prices seen across nearly all other categories. Food prices increased 0.2%, while "core" prices – which exclude the typically volatile food and energy components – rose 0.3% in December. "Core" prices are up 1.8% in the past year, but are showing acceleration in recent months, up at a 2.2% annual rate over the past six-months and 2.5% annualized in the past three months. In other words, both headline and "core" inflation stand near or above the Fed's 2% inflation target, and both have been rising of late. Housing costs led the increase in "core" prices in December, rising 0.3%, and are up 2.9% in the past year. Meanwhile prices for services also rose 0.3% in December and are up 2.6% over the past twelve months. Both remain key components pushing "core" prices higher and should maintain that role in the year ahead. Add in yesterday's report on producer prices that showed rising inflation in the pipeline and we expect consumer price inflation to move to around 2.5% or higher by the end of 2018. Given the strength of the labor market, with the unemployment at the lowest level in more than a decade and headed lower, paired with a pickup in the pace of economic activity thanks to improved policy out of Washington, the Fed is on track to raise rates at least three times in 2018, with a fourth hike looking increasingly likely.
Click here for PDF version