CPI posts first monthly decline in over 2.5 years

STORY: Lifting hopes that inflation is finally on a sustained downward trend, the consumer price index fell for the first time in more than 2-1/2 years in December, according to a report from the U.S. Labor Department on Thursday.

The CPI report showed a steep drop in gas prices and food prices posted only a modest increase. But rents remained very high and utilities were more expensive.

Overall—prices dropped from the month before by a tenth of a percent. Small, but still the first drop in prices since May of 2020.

The report could allow the Federal Reserve to further scale back the pace of its aggressive interest rate hikes, as the central bank aims to lower inflation to its 2% target.

Sameer Samana, senior global market strategist at Wells Fargo Investment Institute, believes the Fed can get there by year's end.

"We think inflation ends the year actually with a 2% handle. And we think that by the end of the year that the Fed will actually be cutting interest rates because we think there's going to be a recession kind of in the middle part of the year that will allow the Fed to kind of start to actually, you know, stimulate the economy into the very tail end of 2023."

Year over year, the consumer price index is still much higher than the Fed’s range, increasing 6.5% - in line with estimates - following a 7.1% rise in November.

Still, the moderation in inflation will be welcomed by Fed officials, but they will probably want to see more evidence that their rate hikes are working.

The Fed is engaged in its fastest rate hiking cycle since the 1980s, raising borrowing costs to cool demand in the U.S. economy, which some experts believe could trigger a recession.

But a separate report from the Labor Department on Thursday showed initial jobless claims came in below expectations, as the labor market remains tight.

Wall Street's main indexes were essentially flat by midday after choppy trading, as concerns remained that the Fed would keep hiking rates further.