The overall CPI rose 0.4 percent in December, while the core rose at just a 0.2 percent rate. This put their year-over-year increases at 2.9 percent and 3.2 percent, respectively.

The main factor pushing the overall index above the core in January was a 4.4 percent jump in gas prices. Gas prices are unlikely to show any comparable rise in January, and may actually decline modestly.

However, food inflation could go in the other direction. Egg prices in particular have been soaring. Even though they are a small share of the CPI (0.15 percent), they can have an outsize impact with a large increase. The egg index rose 3.2 percent in December and could rise even more rapidly in January. This is likely to mean that the non-core components of the CPI rise at least 0.3 percent in the month.

Auto Prices Will Likely Rise Rapidly Again

After falling through most of 2024, new vehicle prices rose sharply in November and December, with the index increasing 0.6 percent and 0.5 percent, respectively. This was associated with a jump in car sales, likely in anticipation of tariffs being imposed by the Trump administration.

Used vehicle prices also rose in November and December, increasing 2.0 percent and 1.2 percent, respectively – although there was also a large increase in October, making the connection to anticipation of tariffs less clear.

In any case, vehicle prices are likely to be a major factor contributing to inflation in January. The December increases added 0.04 percentage points to the inflation rate for the month.

Appliance Prices Could Rise Sharply, Reversing December Decline

The index for major appliances fell 4.1 percent in December. This fall came despite a big upsurge in appliance sales in November and December, presumably in anticipation of tariffs. This was an extraordinarily large decline in this index, which had been reasonably stable over the prior year.

This suggests the decline could have been an anomaly that would be at least in part reversed in January. This is in addition to the possibility that prices will actually be pushed higher by people buying in anticipation of tariffs.

Rental Inflation Will Continue to Slow

The rental indexes have slowed sharply in recent months. Both indexes increased just 0.3 percent in the last month. The rent proper index has risen at 3.3 percent annual rate over the last three months, while the owners’ equivalent rent index rose at a 3.8 percent rate. This is down from increases of 4.6 percent and 4.8 percent, respectively over the last year.

The new tenant rent index, which measures rent in units that turn over, as opposed to the rent in all units that is measured in the CPI, has fallen 2.4 percent over the last year. The CPI rental index follows the new tenant index with a lag. While rents may not actually fall, the CPI index clearly has some room to fall further, dampening overall inflation in the months ahead.

Medical Care Service Inflation Likely to Be Stable

The index for medical care services rose just 0.2 percent in December. This is a bit of slowdown since the monthly rate has been 0.3 percent over the last year. The rate may tick back to 0.3 percent in January, but it will still indicate inflation in the component is reasonably stable. Medical care services had consistently outpaced the overall CPI before the pandemic, so it is reasonable to expect to see this pattern now.

It is worth noting that the index for hospital services has been rising somewhat rapidly, increasing 4.0 percent over the last year. This likely reflects increased consolidation in the industry and the growing role of private equity.

Auto Insurance Index Could Rebound

The auto insurance component of the CPI has been a huge factor in inflation since the pandemic. It rose 11.3 percent year-over-year as of December, following year-over-year increases of 20.3 percent in 2023, and 14.3 percent in 2022. The 2024 increase added 0.32 pp to inflation for the year.

The index rose a relatively modest 0.4 percent in December after rising just 0.1 percent in November and falling 0.1 percent in October. One of the factors that had been driving up the cost of insurance, the cost of auto repairs, has stabilized in the last year, after rising rapidly earlier in the recovery. However, climate related damage to vehicles, from flooding and fires, is likely to continue to worsen, driving up costs. It seems likely that the January index will rise at least as much as the 0.4 percent December figure. The impact of the Los Angeles fires could mean more rapid increases in subsequent months.

College Tuition Costs Remain Under Control

The index for college tuition rose just 0.1 percent in December. It rose 2.6 percent over the last year. Since the pandemic, it has risen at just a 1.7 percent annual rate.

Airfare Index Likely to Fall in January

Airfares jumped 3.9 percent in December, adding 0.32 percentage points to the month’s inflation rate. This was almost certainly an anomaly that will be at least partially reversed in January.

Inflation Continues to Move Towards the Fed’s Target

The January report is likely to present a mostly positive outlook for inflation. The big potential negative is higher food prices driven by higher egg prices, and likely also beef. We may also see further rises in vehicle prices and for other items where people are buying in anticipation of tariffs.

On the plus side, inflation in the rental components, which comprise almost 35.0 percent of the overall CPI and 43.7 percent of the core index, is roughly back to its pre-pandemic pace and headed lower. This will go far towards limiting inflation, unless other factors push in the opposite direction.