The consumer price index (CPI), which tracks changes in the prices paid by US consumers for goods and services, posted its biggest gain in nine months on Wednesday.
However, EY chief economist Gregory Daco says that doesn't mean inflation is the problem – consumer spending is.
“While pundits will focus on rising headline inflation, nothing in this report screams re-accelerating inflation,” Daco wrote in a statement shared with entrepreneur. “Despite all the hype, inflation is no longer a concern.”
US Bureau of Labor Statistics (BLS) reported on Wednesday that the CPI rose 0.4% last month and that the energy index accounted for more than 40% of the increase. Energy prices rose 2.6% month-on-month.
“Specific price gains in gasoline and utility gas prices, slightly higher food prices and an increase in airfare drove the headline figure,” Daco said.
The report backs up its claim: airline fares rose 3.9% in December, after rising just 0.4% in November. Gas prices rose 4.4% for the month, after a more modest 0.6% increase in November, while gas prices rose 2.4% in December compared to a 1% increase in November.
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At the same time, core inflation, or the rise in prices of all items excluding the volatile food and energy categories, was lower than expected. It rose 3.2% over the past 12 months – better than expectations of 3.3%. Core inflation in September, October and November remained at the level of 3.3%.
Housing, which led 40% of the monthly CPI increase in November, played a much less important role in December. The index rose just 4.6% for the year, which the BLS called the smallest one-year increase since January 2022.
According to Daco, the real concern now is not inflation, but its effects.
“What is troubling are the elevated prices that are holding back consumer spending for many lower- to moderate-income families,” he wrote. Higher prices mean that households in this group spend less.
Several major grocery store items rose in price in December, including cereals and bakery products (1.2%), eggs (3.2%) and dairy products (0.2%).
Related: Here's what the CPI report means for your portfolio, according to experts at JPMorgan and EY
What the CPI Report means for rate cuts
Daco stated that despite core inflation falling, the “inflation mirage” created by headline CPI will result in the Fed skipping a rate cut at the Federal Open Market Committee meeting later this month.
However, EY expects three rate cuts in 2025 in March, June and September, he said.