US CPI Preview: December 2023

While headline inflation is set to bounce in December on account of base effects, the core CPI is expected to record a ninth consecutive month of decelerating YoY growth.

Headline CPI expected to rise on the back of base effects

With a very large MoM decline in gasoline prices falling out of the YoY calculation in December, I expect headline CPI growth to rise from 3.1% to 3.3% (3.27% to two decimal places). This compares to a consensus forecast of 3.2%.

Core CPI expected to mark a disinflationary milestone

With the core CPI not impacted by gasoline price base effects, I expect it to record a ninth consecutive month of disinflation. This is expected to result in annual core CPI growth falling below 4% YoY, marking another milestone in the disinflationary process.

I expect core CPI growth to fall to 3.9% YoY, but on a two decimal place basis, I expect the core CPI to fall to 3.85%, which highlights the potential for the core CPI to also fall to a rounded 3.8% in December.

This compares to a consensus forecast of 3.8%.

Monthly headline CPI growth expected to be in-line with its historical average, core CPI modestly above

For a third consecutive month, I expect the headline CPI to record MoM growth that is in-line with its historical (2010-19) average.

For the core CPI, I expect MoM growth to be modestly above its historical average (by 0.1%). This would mark the fourth consecutive month of growth that is above its 2010-19 average by 0.1% or less.

This points to inflation as having largely normalised, despite the core CPI having an enormous ~42% weighting to lagging rent based measures.

Spot market rent adjusted CPI expected to remain <2% YoY

Illustrating the impact of lagging rental prices on the CPI, spot market rent adjusted CPI inflation is expected to remain below 2% YoY on both a headline and core CPI basis.

For the headline CPI adjusted for spot market rents, I expect YoY growth to rise to 1.6% in December. This would mark the seventh consecutive month of annual growth of less than 2%.

For the core CPI adjusted for spot market rents, I expect YoY growth to rise slightly to 1.8%. This would mark the fifth consecutive month of annual growth of less than 2%.

Used car prices expected to record a large MoM decline, driving another material fall in durables prices

With wholesale used car prices recording significant declines in recent months, I expect CPI used car & truck prices to record a major decline in December.

While a two-month lag of the Manheim Index points to a decline of 3.1%, it’s important to note that December tends to be a relatively stronger month for retail used car prices — December’s MoM CPI used car and truck price growth was an average of 0.8% greater than the move implied by a two-month lag of wholesale prices across 2010-19.

Though given that retail prices have already lagged the decline that’s been seen in wholesale prices (implying an additional relative moderation in retail prices in the pipeline), and signs that new car price growth is also starting to falter (as noted in my prior CPI Review), I am forecasting a more modest differential of 0.3% in December (i.e. CPI used car & truck price growth of -2.8%).

The impact of where this volatile category lands could be the difference between an annual core CPI reading of 3.8% or 3.9%.

Food at home prices expected to decelerate further, but food away from home price growth expected to remain elevated

I expect CPI food at home price growth to see a further moderation in its annual growth rate in December, falling to just 1.4% YoY, down from 1.7% in November.

This is a shift that I have been foreshadowing for over a year now, and comes on the back of following changes in the UN FAO Food Price Index, which measures underlying food commodity prices. CPI food at home prices are highly directionally correlated to the UN FAO Food Price Index on a 6-month lagged basis.

Food away from home prices, which are more exposed to lagging services price pressures, are instead expected to record another month of relatively elevated growth. This expectation comes on the back of a reacceleration in MoM growth over recent months.

This is expected to keep YoY growth at 5.3% in December.

Gasoline prices expected to drive a large MoM fall in energy commodities, but YoY growth expected to bounce materially

For the third consecutive month, gasoline prices recorded a material MoM decline, which according to AAA data, fell by 5.9%.

Though in spite of yet another price decline, I expect the CPI energy commodities index to see a bounce in its YoY growth, rising from -9.8% in November, to -3.0% in December. The reason for this, is that in December 2022, the decline in gasoline prices was even larger, with the CPI energy commodities index falling by 12.4% MoM.

It is this base effect that is putting significant upward pressure on annual headline CPI inflation in December.

Rent based measures expected to record another month of elevated growth as they slowly move to reflect spot market rents

The CPI’s rent based measures of owners’ equivalent rent (OER) and rent of primary residence (RPR) are both expected to record another month of elevated growth in December, but see a modest moderation in their relative MoM growth (i.e. MoM growth versus their respective 2010-19 averages) on a 3-month moving average basis.

Remember, the nature of how OER and RPR are calculated means that they are not only lagging, but smoothed in nature, meaning that the shift to better reflect the changes that have occurred in underlying spot market rents is only likely to be gradual.

Looking for further confirmation of decelerating price growth in several services categories

While the CPI’s lagging rent based measures likely have a material length of time to go before falling to historical average growth rates, there’s several services categories that have the potential to reinforce/strengthen disinflationary trends in December.

The CPI motor vehicle maintenance category continues to be one to watch, which after seeing YoY growth reach 14.2% in January 2023, has since seen growth moderate to 8.5% in November.

Much of this moderation has come in the last three months, with MoM growth seeing a major deceleration.

While the CPI motor vehicle insurance category continues to record enormous YoY price growth (19.2% in November), November’s MoM price growth did see a significant moderation from growth rates that were recorded in the first 10 months of 2023. Whether or not this moderation continues over the months ahead, will have material implications for services price inflation and the overall CPI outlook. Given that only one month of relatively more moderate price growth has been recorded, I am forecasting another month of significant growth in December.

For a second consecutive month, and for the third time in the past four months, recreation services prices recorded relatively lower MoM price growth than its respective 2010-19 average in November.

As a result, I am forecasting MoM growth to be only modestly above its historical average in December. Should modestly higher relative MoM growth, or another month of relatively lower MoM growth occur in December, then this would further suggest that YoY price growth (4.8% in November) is likely decelerate significantly in 2024.

While not showing as significant disinflation, the CPI other personal services category has also recorded relatively more modest MoM growth over the past two months. Depending on how December’s data prints, it could act to reinforce a more material disinflationary trend.

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