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CPI +0.5%: Growing but a Welcome Cool-Off

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Wednesday, January 12, 2022

This morning, a fresh look at the Consumer Price Index (CPI) for December is released, with +0.5% on the headline coming in slightly ahead of expectations. It’s also down from the unrevised +0.8% in November. This metric, along with its companion Producer Price Index (PPI) out tomorrow, is an important diagnostic for inflation in the economy.

As such, +0.5% last month is solid: pricing continues northward, but not spiraling out of control. We had seen +0.9% in October of 2021, so coming down 40 basis points in two months represents a welcome cooling off. That October read was the highest we’d seen in 13 years: since the initial bounce-back from the Great Recession.

When we strip out volatile food and energy costs, known as the “core” read, we see this figure bump up to +0.6%. This suggests a bit more blanket inflation across markets; often we will see a +0.5% headline and get a core number lower, which suggests near-term volatility in food and fuel prices are driving the numbers here. Not so much in December’s case.

By the way, that +0.9% we saw for October was matched in both April and June of last year — back when the Great Reopening was gathering momentum, and before supply chain headwinds and the Delta variant of the Covid pandemic threw a wet blanket over proceedings. They amounted to 40-year highs, which has a way of spooking market participants with a sense of history: 40 years ago was the last time extreme inflation held back the domestic economy in a meaningful way.

Year over year, headline CPI is +7.0% — and that is the highest in 40 years. Year over year core comes in at +5.5%, which is the biggest number we’ve seen here since February 1991 — more than 30 years ago. So the market has been right to proceed cautiously, especially in terms of overvaluing growth stocks. It’s this reason more than any other that the tech-heavy Nasdaq is still roughly 7% off its all-time highs reached late last year.

Yet markets are taking this morning’s CPI headline in stride: the Dow, which had been +140 points prior to the CPI release, cuts back a bit to +115. The Nasdaq, on the other hand, gained points — from +65 ahead of the report to +110 at this hour. The S&P 500 has barely budged, remaining roughly +20 a half-hour ahead of the opening bell.

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