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Does the December inflation data disappoint?
Posted on January 13, 2024

The BLS issued a number of measures of inflation for December Thursday. A few articles said that inflation in December was high. December inflation was a little higher than October or November, but the charts in this post would not show that it was very high. We are clearly on a track to less than 3% annual inflation and headed to 2%.

 

== CPI Seasonally Adjusted ==

 

This is the inflation rate most often quoted. The December rate of 0.19% translates to an annual rate of 2.3%. The past 12-month rate is 3.2%, 0.1% greater than the prior 12-month rate. That was because this December’s low increase replaced a lower increase in December 2022.

 

Seven of the last 12 months have had monthly increases less than 0.20%. Five had had increases greater than 0.30%. The next four months of inflation will replace three of the five months with higher inflation.

 

== CPI Core Inflation ==

 

This measure excludes the volatile components of energy and food. It’s similar to the measure the Fed Reserve favors: Personal Consumption Expenditures (PCE) less food and energy. (That measure most often shows lower inflation – about 0.7% less on an annual basis; it’s reported in two weeks.) December inflation was greater than October and November. The last seven months aim at 3.0% annual rate.

 

Core inflation increased in December. The last seven months average to a 3.0% annual rate. The 12-month rate should decline, since the next five months will replace the past five highest-inflation months.

 

== Three are headed to less than 3% annual inflation ==

 

The income thresholds for IRMMA tripwires (Income Related Medicare Adjustment Amounts) adjust based on inflation as measured by the CPI-U – not seasonally adjusted. The adjustment is based on the change in the average inflation rate for the period September ‘23-Aug ’24 as compared to average of the prior same 12 months. We’ve now completed four months of cumulative -0.10% inflation. It’s almost certain the adjustment, calculated in September and announced in October or November, will be less than 3%.

 

 

Tax brackets adjust for inflation based on the same calculation as for IRMMA. They will adjust less than 3%.

 

Social Security COLA uses a different measure of inflation, CPI-W. The chart looks similar to the one for CPI-U. The adjustment will be based on the change in the average of third quarter of 2024 compared to the average for the same quarter in 2023. We have the change for first quarter: inflation was -0.51%. Inflation would have to run a bit wild over the next nine months for the third quarter of this year to reach 3%.

 

CPI-U and CPI-W charts look very similar.

 

== The next I-bond interest rate: <0.5%? ==

 

I-bonds were the hot ticket when they paid 4.81% for six months for a bond purchased May 1-Oct 31, 2022. I bought one in late May of 2022. The following six-month period paid 3.24%. That meant I earned $820 on $10,000 that I had to hold for ~15 months.

 

Treasury calculates the six-month inflation rate for the next bond purchased after May 1 on the six-month change in the CPI-U from September through March. We have the first three months for that calculation: -0.34% inflation. Inflation would have to be fairly high over the next three months to exceed 0.5% inflation for the six months.

 

The inflation rate for I-bonds is set by inflation over a prior six-month period. We’re half way through the upcoming six-month period, and inflation is -0.34%.

 

 

Conclusion: A number of measures of December inflation were issued on Thursday. Some articles said that the December rate was disappointing – too high. I show two charts that tell me that it was not that high. The measure the Fed favors comes out in two weeks, and over the past year it states that inflation is lower each month that reported by other measures.

 

The pattern of inflation for the last quarter of 2023 foretells that a number of inflation adjustments that are announced in the fall will be below 3% annual rate: Social Security COLA, IRMAA tripwires, and tax bracket adjustments. The inflation rate for an I-bond will plummet to less than 1% for the next six-month period starting May 1.

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