Inflation in the U.S. edged up slightly in December, as rising housing costs continued to put upward pressure on the Consumer Price Index. According to the Bureau of Labor Statistics, the Consumer Price Index for All Urban Consumers (CPI-U) increased 3.4 percent over the last 12 months before seasonal adjustment, up from 3.1 in November and from 3.2 percent in October. On a monthly basis, prices edged up 0.3 percent with the index for shelter contributing more than half of that increase. Meanwhile core inflation, which excludes volatile food and energy prices, came in at 3.9 percent in December, down slightly from 4.0 percent the previous month.
Due to its weight in the Consumer Price Index, the cost of shelter continues to be a major driver of inflation. Rents and owners' equivalent rents of residences increased 6.5 and 6.3 percent year-over-year in December, respectively, as the index for shelter climbed for the 44th consecutive month. In fact, excluding the impact of shelter, inflation would have stood at 1.9 percent last month, below the Fed's target level of 2 percent.
Back in the spring of 2021, when inflation took off, the high readings could largely be explained by the so-called base effect, as prices had fallen sharply at the onset of the pandemic a year earlier, when demand for many goods and services had suddenly dried up. Due to that initial dip in consumer prices, year-over-year comparisons were exaggerated for a while, but towards the end of 2021 inflation became a real concern, which turned into a global crisis when Russia attacked Ukraine, resulting in surging food and energy prices. Now that the conflict in Ukraine has dragged on for almost two years, price levels are measured against already elevated prices, partially explaining the steep drop in inflation in the first half of 2023.
Combined with the latest jobs report that showed job gains picking up in December and unemployment remaining below 4 percent, the latest CPI reading will put a slight damper on hopes of the Fed starting to cut rates soon. The FOMC has kept the Federal Funds Rate steady at 5.25 to 5.50 percent since July, putting the breaks on what has been the most aggressive tightening cycle since the early 1980s.