Lower energy prices were a difference maker in December, as consumer prices fell outright for the first time since last March.
The consumer price index (CPI) edged lower to close out 2018, declining by 0.1%, as a 3.5% drop in energy prices more than offset an outsized gain in food prices and the continued uptrend in prices across a range of services. The index dropped to 1.9% on a 12-month basis, its lowest level since August 2017.
Excluding food and energy, the story was very much in line with the trend in recent months. Core CPI was up 0.2% in December, and held steady at 2.2% for the fourth time in the past five months.
The 40+% plunge in crude oil prices since October has been readily apparent to all when filling up at the pump, but has also represented a key catalyst for a temporary lull in upward pressure on prices. The Consumer Price Index clocked in at close to 3.0% in mid-summer, and core CPI had crept up to 2.4%.
A sustained drop in gasoline prices could also provide an additional boost to consumer spending as households have a bit more wiggle room in their budgets for discretionary spending. However, any sustained impact is doubtful as oil prices have already surged to start the year.
Despite the recent uptick in the jobless rate, the labor market remains tight and wage growth has trended above 3% in recent months. Given the relative scarcity of skilled labor, stronger wage growth appears likely to be the norm in the near term. Businesses are unlikely to be willing to fully absorb those additional costs, and consumers will ultimately feel the impact across a range of goods and services.
Many Fed participants noted in the December FOMC minutes the fact that inflation remains “muted,” suggesting that the Fed possibly has room to be patient with future rate hikes in the coming year.
Overall, inflation risks remain well in check and are well down the list of potential concerns for both the capital markets and the economy. That bodes well for 2019, if the Fed can slow the pace of rate hikes or pause outright. Given the recently dovish undertones of their comments, that bodes well for the outlook for rates, and the general mood of investors.
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