CPI goes up, and yet Wall Streeters think that inflation situation got better?

After a moderate increase in the Producer Price Index of 0.2% on Tuesday, many were looking at the inflation report from the consumer side, which hit today.

JUST IN: Inflation remains stubborn. Inflation rose 2.9% (y/y) in December —> the highest annual increase since July. For the month of December alone, inflation rose 0.4% —> the highest since March. Energy (esp. gas) accounted for 40% of the increase. Food also up. Core CPI rose 3.2% (y/y).

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— Heather Long (@byheatherlong.bsky.social) January 15, 2025 at 7:37 AM

Inflation is back near 3% (it was 2.9% in December). The Fed's goal = 2% "Core inflation" down in December, but that's not much comfort to the middle class. Bottom line: It's going to be a battle in 2025 to get inflation fully gone. This is a warning to Trump as he readies tariffs and big tax cuts

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— Heather Long (@byheatherlong.bsky.social) January 15, 2025 at 7:42 AM

Well, that's not going to be good news for the financial markets, who have been worried about the spectre of inflation going back up, which caused Treasury yields to run up over the last month. So it's a down day on Wall Street, right?

WHAT? To me, this would seem like things are going in the wrong direction. And with oil futures back above $80 for the first time in 6 months, that's not help calm down inflation. So why was it such a good day for stocks?

Prices climbed 0.2% month-on-month on a "core" basis, which strips out the more volatile costs of food and gas, an easing from November's 0.3% gain. Over last year, core CPI rose 3.2%.

Until the latest print, annual core CPI had been stuck at a 3.3% gain for the past four months. December was the first time since July that the metric reflected a deceleration in price growth.

The 10-year Treasury yield dropped over 13 basis points to trade around 4.65% after the cooler-than-expected reading. It had been up at its highest level in more than a year, serving as a headwind for stocks. The interest-rate-sensitive small-cap Russell 2000 Index soared in reaction, rising almost 2%.

So the Wall Streeters looked at a relatively tame core CPI and ignored the fact that Americans were paying higher prices overall. Interesting choice.

I looked inside the CPI report, and there isn't a lot there that indicates the 0.2% increase in core prices for December is any major change in direction vs the 0.3% increase in November. Shelter was up 0.3% last month, just like the month before (and up 4.6% for all of 2024). New vehicles were up 0.5% vs 0.6% in November (both are big numbers), and used vehicles went up 1.2% after a 2% increase in November and 2.7% in October. Airline fares jumped by 3.9% in December, and had a 3.2% increase in October. Apparel was up 0.1% vs 0.2% for November, but that's only gone up by 1.2% over the last 12 months, so that wasn't really going up to begin with.

I think these Wall Streeters are trying to make lower inflation and lower interest rates happen by their hopes, and not going on what actually was in that report. And there's nothing in the inflation reports of this week that tell me the story is any different than what we had going into the week. We have a strong jobs market with low unemployment, and prices continue to rise at an elevated but not destructive level of 2.5-3%.

Good spot to be in, but nothing that should cause the Fed to change course from what they indicated last month. As I plan to head to Vegas this weekend, the attitude of these coked-up traders with the Trump Inauguration looming reminds me of the scene in The Big Short that takes place in Sin City, where the people who have seen through the fraud and house-of-cards nature of the US housing market take advantage of a number of morons in the mortgage industry that are high on their own supply.