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Healthy But Manageable Consumer Inflation

Consumer inflationary pressures grew at a healthy, but manageable rate in December 2019.

The core Consumer Price Index (CPI), which excludes food and energy, rose 2.3% year over year last month, around the fastest pace of the economic cycle. As shown in the LPL Chart of the Day, core CPI growth has been steady, thanks to firm U.S. demand, despite slowing producer price and wage growth.

Healthy-But-Manageable-Consumer-Inflation-Growth

Inflation concerns are back in the spotlight after the December 2019 jobs report showed year-over-year wage growth for nonsupervisory workers slowed to 3%, a 15-month low. However, today’s CPI data shows companies still have ample pricing power, a good sign for future profits and economic durability.

“Modestly rising inflation is a healthy trend in this macroeconomic environment,” said LPL Financial Chief Investment Strategist John Lynch. “Even though slowing wage growth is worth watching, 3% growth is a still a pace that could buoy profit margins while still supporting consumer spending.”

Right now, inflationary pressures are right where we want them to be, especially through the lens of monetary policy. Ensuring stable inflation is one half of the Fed’s dual mandates, and year-over-year growth in core Personal Consumption Expenditures (PCE) is right below the Fed’s 2% target.

Historically, year-over-year core CPI growth has run 25 to 50 basis points (0.25–0.5%) higher than core PCE, so December’s core CPI reading could hint to year-over-year core PCE growth just below 2%. That level of growth would support a Federal Reserve pause in interest rate changes. We’ll get December core PCE data January 31.

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