December CPI Comes in Steady; A Bit More On Trump's Feckless Powell Attack

Inflation remains a bit high and bit sticky. But the direction of travel is slowly trending down.

Inflation largely held steady in December, as the CPI rose 0.3% over the month and 2.7% for the year, the latter the same as November (adding a decimal place, yearly inflation is down from 2.74% in Nov to 2.68% in Dec). Both were in line with expectations, while core measures came in at 0.2% and 2.6%, both slightly below expectations.

While inflation measures are still recovering from the shutdown-induced lack of October CPI data, the report shows that while price pressures remain somewhat elevated, the longer-term direction of travel is toward normalization. The figure shows Dec/Dec CPI inflation since ‘21, when the pandemic-induced spike was just starting to retreat. Since ‘23, the trip back down to pre-pandemic levels has been slow, with this year’s tariffs adding to the stickiness. But inflation is closing in on the Fed’s 2% target rate (that’s the PCE target; the CPI runs a bit hotter so its target is a bit higher).

A few notes from under the hood:

—Vehicle inflation has been a bit jumpy of late, especially used units, which had a few spiky months, but last month new-car/truck inflation came in at zero and used at -1.1%. Perhaps there’s still a tariff effect to come in this sector as built-up inventories draw down, but so far, not too much pressure here.

—The heavily weighted shelter price was up 0.4% in Dec, but is coming back in line with pre-pandemic growth rates (the figure shows the 6-month annualized rate to capture more recent movements). This measure is slightly biased down, as I discussed in my last CPI write-up, but the broader trend is favorable and a big mover of the overall index.

—Grocery prices were up 0.7% in Dec and 2.4% over the past year. Restaurant prices are up a buff 4.1% over the year, which won’t surprise you if you’ve eaten out recently. Re groceries, higher prices for meats, dairy, coffee are all “feeding” directly into affordability concerns. Part of that is the tariffs and part, especially re beef, is drought and other high production costs.

—Readers know I worry about core service prices (services ex-housing and energy services), which I’ve observed as pretty high and pretty sticky, and arguably not much related to tariffs. That price was up 0.3% over the month and 2.8% over the year. Price pressure from this group remains above its pre-pandemic level but here again, the trend is slowly normalizing.

—With December’s CPI, we can look at real hourly earnings for the year. As you see, they’re holding up at around 1%, yr/yr, which is a decent pace, especially given the weakening job market. That’s probably strong enough to support healthy consumer spending, especially when combined with the wealth effect from stock-market gains. And given recent strong productivity growth prints, such wage-growth rates are non-inflationary.

Where might the Fed go with all this, including the recent dust-up that captured everyone’s attention yesterday, wherein the DOJ announced they were pursuing criminal charges against Powell? Markets have the probability of the Fed holding rates where they are at their late-Jan meeting at 97%, which is as locked-in as it gets, and I’m right there with them. Inflation is stable but still a bit too high, the job market is weaker than it has been, especially re hiring, but layoffs remain low and wages, as shown, are growing at a decent clip. So, a good time to pause, look around, and assess conditions.

I’m happy to report that at least this round of Trump’s action against the Fed chair are backfiring in a big way. Numerous Senate Rs, including those on the influential banking and financial committees, i.e., ones that could block Trump Fed nominees, are voicing displeasure at this misguided, sloppy, indefensible move against the Fed chair. In all the media discussion I had on this yesterday, the only pushback I got was that the group of us who signed a statement against the DOJ’s action called it “unprecedented,” which, given a similar move against Lisa Cook, was arguably not the case.

Jason Furman’s take here on the strong, negative reaction to Trump’s move is worth a read (I know Trump is pretending this happened without his knowledge; I’m sure he’s lying). Powell kept his head down during years of Trump’s attacks, calmly sticking with his data-driven ways. But in this case, at this moment, he wisely and forcefully spoke out, unequivocally calling the attack for what it is—a “pretext” to politicize the central bank, a move that always turns out badly for economies and the people in them. Add to that the fact that over many years, Powell’s build up good relationships in Congress, establishing himself as a non-partisan technocrat, doing his best not solely to carry out the most effective monetary policy but to explain it to policymakers.

A good question that came up yesterday was: why is Fed independence so important? I was reminded that when I chaired the CEA, we assiduously avoided saying anything about the Fed, doing our part to sustain their independence. But we did make one exception: we wrote a piece on why that independence is so important, explaining both theory and evidence. If this question is interesting to you, give it a look. If I can say so, I think it’s holds up well.