Core inflation moderates as labour tightness fades

The 0.1% m/m decline in headline CPI in December was principally due to a 9.4% m/m drop in gasoline prices, but core consumer prices also increased by a more modest 0.3% m/m, extending the run of weaker monthly gains to three. Although core CPI inflation was still 5.7% in December, the three-month annualised rate slowed to a 20-month low of 3.1%, from a peak of 7.9% last June. Admittedly, that is still a little above the rate consistent with the Fed hitting its 2% target on the alternative PCE measure, which usually runs about 0.5% points lower. But any remaining overshoot is almost entirely due to the ongoing strength of CPI shelter inflation, which we know will slow markedly soon.