Rising shelter, healthcare costs lift US consumer inflation in December

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. consumer prices increased more than expected in December, with Americans paying more for shelter and healthcare, suggesting it was probably too early for the Federal Reserve to start cutting interest rates.

Expectations for a rate cut in March were also tempered by other data on Thursday showing the labor market remained fairly tight at the start of this year, with the number of people filing new claims for unemployment benefits unexpectedly falling last week. The data followed news last Friday that the economy added 216,000 jobs in November and annual wage growth picked up.

"The final stretch of the path back to the 2% inflation target could be harder than the market is anticipating," said Ryan Brandham, head of global capital markets, North America, at Validus Risk Management.

The consumer price index (CPI) rose 0.3% last month after nudging up 0.1% in November, the Labor Department's Bureau of Labor Statistics said. The cost of shelter, which includes rents, hotel and motel stays as well as school housing, accounted for more than half of the increase in the CPI.

Persistently high inflation poses a threat to President Joe Biden's prospects for reelection later this year. Frustration over the rising cost of living has weighed on Biden's popularity, even as other aspects of the economy, including the labor market, have remained favorable.

Gasoline prices rebounded 0.2% after dropping 6.0% in November. Food prices rose 0.2% for a second straight month. Grocery food inflation nudged up 0.1%, matching the prior month's gain. Egg prices surged 8.9% as the spread of avian flu disrupted egg-laying operations at some commercial farms.

Meat and dairy products also cost more. But breakfast cereals dropped 2.4%, the largest decrease since January 2007. Vegetables were also a bit cheaper. In the 12 months through December, the CPI rose 3.4% after increasing 3.1% in November. Economists polled by Reuters had forecast the CPI would gain 0.2% on the month and climb 3.2% on a year-on-year basis.

Since slowing to an annual increase of 3.0% last June, further progress towards lower consumer inflation has been limited by persistently high rents. The annual increase in consumer prices has cooled from a peak of 9.1% in June 2022.

Inflation averaged 4.1% in 2023, down from 8.0% in 2022.

Financial markets still see more than a 60% chance of a rate cut at the Fed's March 19-20 policy meeting, according to CME Group's (NASDAQ:CME) FedWatch Tool. The Fed has hiked its policy rate by 525 basis points to the current 5.25%-5.50% range since March 2022.

Stocks on Wall Street were trading lower. The dollar rose against a basket of currencies. Longer-dated U.S. Treasury prices fell.

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GOODS DEFLATION STALLS

Excluding the volatile food and energy components, the CPI rose 0.3% last month after climbing by the same margin in November. The so-called core CPI was driven by higher shelter costs, which increased 0.5% after climbing by 0.4% in November.

Owners' equivalent rent, a measure of the amount homeowners would pay to rent or would earn from renting their property, also rose 0.5% after a similar gain in the prior month.

Rental inflation has remained elevated despite anecdotal evidence suggesting that rent asking prices were going down. Rent measures in the CPI tend to lag the independent gauges by several months. There is also a large stock of apartment buildings in the pipeline, adding to economists' expectations that rents will lead inflation lower this year.

Services inflation remained sticky, gaining a solid 0.5%, which also reflected a 0.6% increase in healthcare costs. Airline fares rebounded 1.0%. Excluding rents, services increased 0.6%, matching November's rise.

Goods price deflation stalled amid the second straight monthly increase in the cost of used cars and trucks, which more than offset declines in household furnishing and apparel. Goods prices rose 0.1% after dropping 0.7% in November. Core goods prices were unchanged after falling 0.3% in the prior month.

"Until we see further progress on services inflation, the Fed will likely be worried about upside risks to inflation," said Stephen Juneau, a U.S. economist at Bank of America Securities in New York.

The overall core CPI advanced 3.9% on a year-on-year basis in December, the smallest gain since May 2021, after rising 4.0% in November. Though consumer prices remain elevated, measures tracked by the U.S. central bank for its 2% inflation target have improved significantly.

Based on the CPI data, economists estimated that the core personal consumption expenditures (PCE) price index rose 0.2% in December after gaining 0.1% in November. Rents, which account for a larger share of the CPI basket, have a smaller weighting in the PCE price index.

In the 12 months through December, the core PCE price index is forecast to increase 3.0% after advancing 3.2% in November.

The release of producer price data on Friday will offer more clues on the December PCE price index data, which is due to be released later this month. With the resilient labor market keeping wage growth elevated, some economists expect a rate cut in May or June.

The labor market is gradually easing as layoffs remain low by historical norms.

In a separate report on Thursday, the Labor Department said initial claims for state unemployment benefits fell 1,000 to a seasonally adjusted 202,000 for the week ended Jan. 6.

Economists had forecast 210,000 claims for the latest week.

Claims data tend to be volatile at the start of the year. Filings remain in the lower end of the 194,000-265,000 range that prevailed in 2023. Employers are hoarding workers following difficulties finding labor in the aftermath of the COVID-19 pandemic, keeping a recession at bay.