Overview: Two of the biggest economic reports of the month were released over the past week, with very different results. The labor market data exceeded expectations, while core inflation fell short. Due to these offsetting outcomes, mortgage rates ended the week nearly unchanged but remained near their highest levels in about eight months.
The important Employment Report released on Friday indicated that the labor market sharply exceeded expectations for the second straight month. The economy added 256,000 jobs in December, far above the consensus forecast of 160,000 and the most since March. Strength was seen in a wide range of sectors including retail, healthcare, and leisure/hospitality. The unemployment rate unexpectedly declined from 4.2% to 4.1%. Also notable, the number of people who have permanently lost their jobs dropped significantly. Finally, average hourly earnings, an indicator of wage growth, were a solid 3.9% higher than a year ago.
While there are many inflation indicators released each month, the Consumer Price Index (CPI) is one of the most widely followed by investors. To reduce short-term volatility and get a better sense of the underlying inflation trend, investors generally prefer to look at core CPI, which excludes food and energy. In December, core CPI rose just 0.2% from November, below the consensus forecast of 0.3%. On an annual basis, it was 3.2% higher than a year ago, down from an annual rate of increase of 3.3% last month, matching the lowest level since April 2021.
Although this annual rate is down significantly from a peak of 6.6% in September 2022, it is still far above the readings around 2% seen early in 2021, which is the stated target level of the Federal Reserve. One of the biggest challenges for the Fed in bringing down inflation has been persistently high shelter costs, which represent the price of housing and account for around one-third of the CPI weighting. In December, shelter costs were a sizable 4.6% higher than a year ago. Other categories with large increases this month included transportation services, used vehicle prices, and medical care services.
Another significant inflation indicator released this week that measures costs for producers also was below expectations. The core Producer Price Index (PPI) was flat from November, far below the consensus forecast for an increase of 0.3%. Investors place less weight on PPI because it represents a smaller portion of the economy than CPI.
Job Gains (thousands)
Week Ahead
Jan. 16
Retail Sales report
Import and Export Price Indexes
Jan. 17
New Residential Construction report (also known as Housing Starts)
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