December Consumer Price Index Preview

Dr. Jeffrey Roach | Chief Economist

Last Updated:

Additional content provided by John Lohse, CFA, Sr. Analyst, Research.

As we approach Wednesday’s release of the December 2024 Consumer Price Index (CPI) report, we expect a continuing trend of disinflation, albeit at a more measured pace than previously observed. This slowdown in progress reflects the complex economic landscape we find ourselves in as we move further into 2025. As such, we’ll be doing a two-part blog over today and tomorrow, previewing and reviewing the December CPI report.    

Headline CPI: A Gradual Descent 

The market anticipates a 0.4% month-over-month (m/m) increase in the headline CPI for December, which would notch the final 2024 year-over-year (y/y) total at 2.9%, which is a touch above our 2.8% estimate. These estimates suggest that inflationary pressures, while easing, remain persistent. Progress towards the Federal Reserve's (Fed) 2% target has been made, but the journey is far from over. 

Core CPI: The Stubborn Heart of Inflation

Core CPI, which excludes volatile food and energy prices, continues to be a focal point for economists and policymakers alike. We expect an m/m increase of about 0.3% in core CPI, a slight slowdown from the prior month. This modest deceleration in core inflation underscores the challenges in addressing underlying price pressures within the economy. 

The Goods vs. Services Divide 

One of the most intriguing aspects of the current inflationary environment is the divergence between goods and services inflation. Goods inflation has seen consistent outright y/y deflation in 2024. Services inflation has proven to be much stickier amid rising wages, substantial wealth effects, and a continued spending appetite (pun intended) for upper-income earners. The “Goods vs. Services Inflation” chart highlights the different paths goods and services inflation has taken in 2024.  

Investors Are Seeing a Downward Trend in Services Prices

And durable prices keep falling

Line graph of goods vs. services inflation year over year from November 2014 to November 2024 as described in the previous paragraph.

Source: LPL Research, U.S. Bureau of Labor Statistics 01/14/25 

Institute for Supply Management (ISM) Report 

Last week’s ISM service sector activity data showed a pickup in prices paid for inputs, with the index rising to 64.4, marking the highest level in almost two years. The ISM Manufacturing Prices Paid component came in at 52.5, an increase from the November reading of 50.3. The report stoked heightened inflation fears and sent bond yields higher as the 10-year U.S. Treasury closed the week above 4.75%. It appears demand has begun to be pulled forward as businesses position themselves for anticipated tariff implementation under the incoming Trump administration. The ISM services report is of particular interest as the domestic economy has a meaningful structural tilt towards service-oriented consumption. This metric has proven to be a good predictor of future CPI. As displayed in the “CPI Tends to Lag ISM Services PMI” chart, CPI tends to have a slight lag behind the ISM Services Purchasing Managers’ Index (PMI). 

CPI Tends to Lag ISM Services PMI

Line graph of consumer price index vs. ISM services PMI from 2018 to 2024 highlighting CPI tends to lag behind PMI, as described in the previous paragraph.

Source: LPL Research, Bloomberg 01/13/24

While the Fed maintains its preferred inflation gauge of the Personal Consumption Expenditure (PCE) index, there’s no doubt the market will be looking to tomorrow’s CPI report for any signs of an uptick in inflation. Currently, the labor market remains strong, giving the Fed flexibility in containing the second half of its mandate — inflation. Fed funds futures markets have priced out interest rate cuts until at least this summer, albeit at a slim margin. Both Treasury bonds and equity markets have recently been shaken by renewed inflation fears. As such, LPL Research has maintained an allocation to diversifying alternative strategies both in the Tactical and Strategic Asset Allocations (TAA and SAA). These strategies are designed to stem drawdowns like what we’ve seen so far in 2025, and in our estimation, should be considered by asset allocators alike. Please check back for commentary, analysis, and takeaways after Wednesday’s report is released. 

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Dr. Jeffrey Roach

Jeffrey Roach guides the overall view of the economy for LPL Financial Research and has over 20 years of experience in investing and economics.