Rising Rents Pushed Inflation Higher in December

The consumer price index offered up a surprising uptick, damaging hopes that the Fed will be cutting rates anytime soon.

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The consumer price index rose 3.4% on an annual basis in December, according to Labor Department data released Thursday, ending a three-month streak of cooling inflation. While the numbers aren’t bad per se, they may be enough — coupled with a continuously hot labor market — to temper expectations of a fast and furious rate-slashing campaign to kick off the new year.

That Guy’s a Fed

Most economists had expected a 3.2% rise in prices, which still would’ve been an increase from November’s 3.1% rise. The good news? Nearly everybody has a job. In a separate report Thursday, data from the Labor Department showed that weekly filings for new unemployment benefits fell to 202,000, below economists expectations and the lowest level since October. In another report last week, the Labor Department said that the US economy added about 216,000 jobs in December, with the unemployment rate still hovering at 3.7%.

Together, the reports proved enough for traders in futures markets to slightly revise expectations of a Fed rate cut in March (The Fed, however, does tend to lean more on the personal-consumption-expenditures price index to measure inflation — that data will be released later this month). 

As is often the case with inflation, the increased prices can largely be explained by one all-important category:

  • Shelter prices, which are weighted at about one-third of the CPI, increased by 0.5% month-on-month in December, making them responsible for over half of the month’s price increases.
  • Both rent and hotel prices drove much of the rise in shelter. But there may be good news for renters: Rent inflation for studios-through-two-bedroom housing has cooled for seven straight months, and, if and when interest rates drop, a corresponding dip in mortgage rates will likely loosen the rental market as well.

Heading South: The slight uptick in CPI comes at a tricky time. After nearly two straight years of inflation doomerism, American consumers’ expectations of inflation are now nearly in line with pre-pandemic averages, according to a Federal Reserve Bank of New York survey released earlier this week. But not everyone around the globe is so lucky. Officials in Argentina released data on Thursday showing a 25% CPI increase in December, bringing the annual inflation rate to an eye-popping 211%. Yeah, we’re good with 3.4%.