Compelling and consistent enough for ya?

As noted in a previous post, FOMC member Michelle Bowman recently said she was looking for "compelling" and "consistent" evidence that inflation was headed back toward the Fed's 2 percent target before concluding that policy tightening had gone far enough.  Will the December CPI data, released today by the Bureau of Labor Statistics, influence her thinking in any way?  Let's take a look.

Per the BLS, headline CPI fell 0.1 percent in the month of December, the first month-on-month decline since May 2020. This lowered the year-on-year rate to 6.5 percent from the 7.1 percent recorded in November. It's worth pausing for a second to reflect on the fact that a very small month-on-month decline led to a much bigger fall in the year-on-year rate. As noted many times already on this blog, the year-on-year rate, with which the media are obsessed, is very literally old news, biased higher by the alarming monthly data seen almost a year ago.  As the very large month-to-month increases seen in early 2022 start to fall out of the index, the year-on-year rate should move steadily lower in the months ahead.

Unsurprisingly, the continuing fall in energy prices was a major contributor to the December data. Gasoline prices fell 9.4 percent in the month and are now, remarkably, 1.5 percent lower than a year ago. However, the good news was not confined to energy prices.  Prices for food at home rose only 0.2 percent in December, down from 0.5 percent in November, well below the monthly pace seen throughout 2022, although the year-on-year rate remains elevated at 11.8 percent. 

Stripping the always volatile energy and food subcomponents out of the index, there are clear signs that the core inflation rate is easing. The index for all items except food and energy rose 0.3 percent in the month, with the year-on-year rate falling to 5.7 percent from the 6.0 percent pace seen in November. The annualized rate of increase in this index for the last three months (October-December) is 3.2 percent; by comparison the annualized rate for July-September was close to 6 percent. 

These lower inflation numbers no longer look anomalous -- they appear to indicate a real change in trend. Will this be sufficiently compelling and consistent to sway Ms Bowman and her colleagues?  We'll just have to wait until February 1 to find out.