• The Consumer Price Index (CPI) increased 0.5% in December, more than the consensus expected +0.4%. The CPI is up 7.0% from a year ago.
• Food prices increased 0.5% in December, while energy prices decreased 0.4%. The “core” CPI, which excludes food and energy, rose 0.6% in December, more than the consensus expected 0.5%. Core prices are up 5.5% versus a year ago.
• Real average hourly earnings – the cash earnings of all workers, adjusted for inflation – increased 0.1% in December but are down 2.4% in the past year.
  Real average weekly earnings are down 2.3% in the past year.

Implications:

Consumer prices continued their rapid ascent in December, rising 0.5% for the month, and pushing the 12-month increase for the year of 2021 to 7.0%, the largest in nearly 40 years. Inflation in December was broad-based, with shelter, food, and new and used vehicles all making significant contributions. Housing rents (rents for both actual tenants and the rental value of owner-occupied homes) showed no signs of slowing down, rising 0.4% for the fourth consecutive month. Rents are important to watch now that a national eviction moratorium has ended and home prices are up a blistering 28% since before COVID. Rents make up more than 30% of the overall CPI, so we expect it to be a key driver for inflation in 2022 and the years to come. Meanwhile, food prices increased 0.5% on the backs of higher costs for dairy as well as fruits and vegetables. Energy prices declined 0.4% in December, as prices for gasoline and natural gas both decreased (-0.5% and -1.2%, respectively). Stripping out the volatile food and energy components, “core” prices rose 0.6% for the month and are up 5.5% in the past year, which is also another multi-decade high. Prices for new and used vehicles continue to be a driver for core inflation, rising 1.0% and 3.5% , respectively, for the month. It’s important to recognize the inflation experienced today is not merely a rebound from the steep price declines in 2020 when COVID first hit the US; consumer prices are up at a 4.4% annual rate since February 2020 and core prices are up 3.6%, both well above the Fed’s long-term inflation target of 2.0%. The December 2020 forecast from the Fed for inflation in 2021 to come in at 1.8% shows its models fundamentally misunderstand the driver of sustained inflation. This inflation has never been transitory, and it appears the Fed has finally arrived at the same conclusion by announcing a pickup in the pace of tapering asset purchases and signaling a readiness for multiple rate hikes in 2022. The bad news is the Fed is very late to the party. As the massive 39% increase in the money supply continues to gain traction, inflation will be a key indicator to watch in 2022.