The latest inflation numbers are in and, once again, there’s something for everyone in the December report on consumer prices.
As usual, the immediate focus will be the top-line CPI number, which posted a sharp rise last month relative to November. Consumer prices advanced by 0.5% in December after standing pat in November, the Labor Department advised today. The main source for the rebound in prices was energy.
Ah, but energy prices are retreating this month, suggesting that the December CPI is already out of date and that January’s CPI update will provide a more comforting profile in the eternal battle against inflation. Crude oil futures continue to tumble in ’07 and now change hands at the lowest levels since mid-2005.

Perhaps salvation is coming on the inflation front, although before we get too giddy, let’s review the core CPI numbers, which is the Fed’s primary concern. On that score, there’s reason to wonder what comes next. Core CPI, which excludes energy and food prices, made a comeback last month, jumping 0.2% in December, the highest since September. That puts the annual change for core CPI at 2.6%, unchanged from November.
As our chart below reminds, it’s too early to celebrate the death of core inflation and too early to say that the future looks ugly. The upswing in this measure of pricing pressure that began in 2004 is still intact. What’s unclear is if core CPI has run its course and is headed for lower realms, or if it’s gearing up for another surge.

What this means for monetary policy is more of the same. The Fed will continue to sit on its hands, neither raising nor lowering interest rates when the FOMC meets next at the end of this month. At some point, core CPI will reveal its true nature, and the Fed will feel compelled to tighten or loosen. But the signals are still crossed, the numbers are still mixed and the waiting game continues.