No One Is Worried About Inflation

We’ve been talking a lot about the possibility of higher inflation in 2021 due to the large spike in commodities prices, the market pricing in rate hikes sooner, the fiscal stimuli, and the coming economic reopening. The December CPI report reminds us we are starting from a low base. Inflation is still low as of last month. That low base is partially why Oxford Economics sees higher CPI early this year which then tapers in the 2nd half. That’s more of the same, not a new cycle with higher rates and inflation. That being said, it’s tough for them to predict inflation with such accuracy since we don’t know what the next fiscal stimulus will look like and how quickly the economy will go back to normal once the virus is vanquished.

In December, headline CPI was 1.4% which was up from 1.2%, and beat estimates by a tenth. Energy is starting to be less negative; it will have a big positive impact on inflation in 2021 because of easy comps (starting in March). Core CPI was 1.6% which was no change from last month and 1 tenth below estimates. Energy prices were down 7% and food prices were up 3.9%. The rise in food prices was evenly driven by food at home and away from home. Limited services meal and snacks had 6% inflation. That’s fast-casual and fast food. People don’t like to eat in the street in the middle of the winter. Full services inflation was 3%. Meats, poultry, fish, and eggs had high inflation again at 4.6%.

This was an unusual report compared to the past few years because core commodities prices were up more than core services. They were up 1.7% because used cars and trucks had 10% inflation which is massive. Core services inflation was only 1.6% because transportation services prices fell 3.5%. Shelter inflation was 1.8% and medical care services inflation was 2.8%. Medical care services inflation has been on a wild run as it has fallen from 6% in June. 

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