The current lower inflation compared to a year ago carries significant importance, as does the decreasing inflation expectations among the public.

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1According to the recent report from the Labor Department on Thursday, consumer prices experienced a seasonally adjusted 0.3% increase in December from November, resulting in a 3.4% rise from the previous year. 1This marks a slight uptick from the 3.1% year-over-year increase reported in November. However, core prices, excluding the often volatile food and energy items to better reflect inflation's underlying trend, registered a 3.9% increase from a year earlier. 1Notably, this is the first time they have risen less than 4% since May 2021.

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The observed cooling trend is expected to persist, with one contributing factor being the lag in the Labor Department's measure of housing costs for owners and renters. This measure, derived from rents, lags behind the actual changes in rents for newly signed leases.

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1Recent data from private providers like Zillow and a new tenant rent index from the Labor Department indicate a significant cooling of new rent prices. However, this is yet to be fully reflected in the inflation report's measure of shelter prices, which recorded a 6.2% increase from a year earlier in December, contributing 2.1 percentage points to the overall price increase.

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It is anticipated that these changes will become more evident in the coming months, a factor recognized by Federal Reserve policymakers. This recognition is part of the reason they have concluded their rate-increasing campaign and are now contemplating potential cuts. Despite expectations among investors for cuts as early as March, the Fed may delay such actions, considering that inflation remains relatively moderate and the job market continues to display strength.

1The recent report from the Labor Department on Thursday highlighted that initial claims for unemployment remained remarkably low.

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Sources:

1https://www.fidelity.com/insights/markets-economy/americans-inflation-cooling