The December CPI included a number of anomalous movements in both directions, causing the overall inflation figures to come in pretty much in line with projections. The overall CPI rose 0.3 percent for the month, while the core index rose 0.2 percent. This brought year-over-year inflation in the overall index to 2.7 percent and 2.6 percent in the core index.

Food Inflation to Remain Moderate

There was a big jump of 0.7 percent in food prices in December. That might have been in part a result of the erratic collection of data for November due to the government shutdown. While BLS did not publish a monthly inflation number for food in November, the year-over-year increase was a surprisingly low 1.9 percent. The big jump in food prices reported for December raised the year-over-year increase to 2.4 percent.

The January figure is likely to come in around 0.2 percent, which is consistent with the year-over-year rate of 2.4 percent we saw in December. Reductions in various tariffs that Trump had imposed earlier in the year will help alleviate pressure on food prices. It also seems that ICE has largely chosen to ignore undocumented workers in agriculture, especially in Republican led states like Texas and Florida. While many migrant workers have likely left over fears of deportation, and the flow of new workers has slowed sharply, immigration policies have not had as much impact on farm labor as many had feared.

The rate of inflation for restaurant meals has consistently outpaced food inflation by a percentage point or more. This is largely due to higher labor costs. The rate of inflation for restaurant meals will come in around 0.3 percent in January.

Higher Electricity Prices Will Offset Falling Gas Prices

Gas prices have been on a downward path most of last year. This will likely continue with the January report, with the index likely showing a drop of around 1.0 percent. However, the impact of falling gas prices is likely to be offset by higher electricity prices. Electricity prices rose 6.7 percent year-over-year through December. They fell 0.1 percent in December, but that was likely an anomaly. Increased demand from data centers is pushing up prices around the country. The net effect of the rise in electricity prices and the drop in gas prices will be to leave the energy index little changed for the month.

Rental Inflation Continues to Moderate

The rate of inflation in the rental indexes is largely back to its pre-pandemic pace. The year-over-year increase in the rent proper index was 2.9 percent in December, while it was 3.4 percent in the owners’ equivalent rent index (OER). The monthly rates are being lowered because the methodology BLS applied for the missing data in October effectively assumes a zero increase for the month, which will continue to affect monthly readings until April. The rent proper index is likely to show a 0.2 percent rise in January, while the OER index will show an increase of 0.3 percent.

There has been a modest rise in the vacancy rate for both rental housing and owner-occupied units over the last year and a half. This is putting downward pressure on rents in units that turnover, with the indexes that measure inflation in marketed units showing near zero inflation or deflation. This will ensure that the rate of inflation in the CPI rental indexes continues to trend downward.

Medical Care Services Continue to Outpace Overall Inflation

The medical care service index rose 0.4 percent in December and was up 3.5 percent year-over-year. The pattern of health care costs outpacing overall inflation is likely to continue. It is important to remember that the CPI measure of health care inflation is likely to seriously understate inflation as people experience it. The CPI measures the increase in the price of the same goods and services, but as new services and procedures are developed, it increases what people pay for health care, either directly through out-of-pocket expenses and insurance premiums, or indirectly through employer-provided health insurance or costs incurred by governments.

Car Prices Likely to Rise in January

Car prices have been surprisingly tame given the jump in tariffs on cars, as well as materials and inputs. Prices have risen just 0.3 percent over the last year, as manufacturers have opted to eat most of these tariffs. This corresponds to the sharp drop in profits for the Big Three auto manufacturers. It is likely that they will be looking to recover some of these losses with higher prices this year, with a modest rise in January. That will likely be the case with used cars as well.

Prices of Supply-Chain Goods to Rise Moderately

Other core commodities where imports are a large share of consumption are likely to show a modest price rise in January. It is important to remember the price of these items was on a downward path until Trump took office and tariffs pushed them higher. There is still likely some pass-through being felt.  

The Big Movers: Hotel Prices, Airfares, Auto Insurance

These categories account for a relatively small share of the CPI, but because they often have large erratic movements, they can have an outsize influence on the CPI in any given month. In December, hotel prices rose 3.5 percent, adding almost 0.04 percentage points to the rate of inflation for the month. Year-over-year prices are down 1.5 percent. Part of the December rise might have been a result of the limited data collection in November. In any case, the index will almost surely rise much less in January.

The index for airfares rose 5.2 percent in December, adding more than 0.04 percentage points to the December inflation rate. The index is down 3.4 percent year-over-year. Inflation for airfares is likely to be close to zero in January.

BLS didn’t publish the change in auto insurance prices for December because it didn’t have enough data, but it indicated it was negative in its analytic tables. This index is up 2.8 percent year-over-year. It will likely show at least a small rise in January.

Overall Picture: Moderate Inflation with No Clear Direction

The January numbers are likely to be very similar to the December data. Both the overall and core indexes are likely to rise by 0.3 percent. This will put the year-over-year inflation rate at 2.7 percent in both measures. This should not be especially concerning, but it is still well above the Fed’s 2.0 percent target. Slower wage growth may be a factor lowering inflation in future months, but disruptions created by new tariffs and large-scale deportations will be a factor pushing prices higher.