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Market participants focused on December’s Consumer Price Index (CPI) report this week. Headline CPI fell 0.1% in December versus the +0.1% reading in November. Inflation rose 6.5% year-on-year, down from 7.1% in November. Core CPI edged up slightly to 0.3% in December, and to 5.7% on a year-on-year basis, from 6.0% in November. A key factor driving down inflationary pressure this month was a 4.5% drop in energy prices, led by falling gasoline prices. Core goods prices fell 0.3% for the month and in particular, used cars saw a substantial drop along with new-car prices which contracted for the first time in almost two years. Core services prices were up 0.5% for the month driven by increases in shelter and medical-care services. Overall, this was a constructive report on inflation and gives the Federal Reserve room to reduce the pace and magnitude of future federal funds rate hikes. The next meeting of the Federal Open Market Committee (FOMC) will be on February 1st.

The U.S. economy added 223,000 jobs in December, slightly higher than market expectations of 203,000, but a decline from November’s revised increase of 256,000. In somewhat of a surprise, jobs in the goods producing sector were up 40,000 in December with an increase of 28,000 in construction, 8,000 in manufacturing, and 4,000 in mining and logging. The unemployment rate dipped to 3.5%, returning to its pre-pandemic level, and lower than the Bloomberg survey of 3.7%. The labor participation rate increased only slightly to 62.3% from 62.1% in November indicating the supply of labor will likely remain a challenge for employers in 2023.