Rising Prices: Which Goods and Services Are Driving Inflation?

The December Consumer Price Index (CPI) showed that underlying inflation fell for the first time in six months, but rising costs for key goods and services continue to pressure peoples' wallets.

For the record, headline December CPI increased 0.4% month over month – a slight increase over the 0.3% rate seen in each of the previous four months – to match economists' expectations. On an annual basis, headline CPI rose 2.9%, according to the Bureau of Labor Statistics. Although inflation accelerated on a year-over-year basis, the print comported with market forecasts.

More importantly, core CPI, which excludes food and energy costs and is considered a better indicator of future prices, increased 0.2% after rising 0.3% for four straight months. Not only did that beat estimates for a 0.3% increase, it represented the first drop in the rate in six months.

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On an annual basis, core CPI also came in soft at 3.2% vs the median estimate of 3.3%.

"Today’s CPI report gives little relief to most consumers, however," writes David Royal, chief financial and investment officer at Thrivent.

Headline inflation was driven by increases in energy, food and shelter costs, Royal notes. Sticky inflation in energy prices is an "unwelcome reversal of declines we’d been seeing," he adds. Food prices, which had been "tame in the first half of 2024, continued their acceleration."

The bottom line from the December CPI report is that prices are still rising faster than consumers would like.

Between 2000 and 2020, annual inflation in the U.S. averaged just 2.1%. (Recall that the Federal Reserve's inflation target is 2%.) Perhaps we didn't appreciate it enough at the time, but the first two decades of the 21st century were a sort of Goldilocks era for inflation: not too fast and not too slow.

Just have a look at some of the subcategories in the latest CPI report to see how much things have changed. Below we highlight the goods and services that are weighing most heavily on folks' finances.

Rising prices: where inflation is hitting hardest

"The index for energy rose 2.6% in December, accounting for over forty percent of the monthly all items increase," said the BLS.

The gasoline index increased 4.4% over the month, while fuel oil likewise rose 4.4%. The electricity index increased 0.3% after falling 0.4% the prior month. Relatedly, transportation services spiked 0.5% vs a flat reading in November.

"The flip side is that strength in transportation services speaks to the health of the economy," writes Scott Helfstein, head of investment strategy at Global X.

Housing costs, or the shelter index, also remained sticky and contributed to inflation last month.

"The shelter index increased 0.3% in December, as it did in November," the BLS said. "Owners' equivalent rent also rose 0.3 percent over the month, as did the index for rent."

Elsewhere, prices for airline fares, used cars and trucks, new vehicles, motor vehicle insurance and medical care all rose in December.

In better news, "personal care, communication and alcoholic beverages were among the few major indexes that decreased over the month," the BLS said.

Where inflation goes from here is hard to say as forecasters brace for the potential impact of tariffs under the new administration in Washington, D.C.

"As we have argued in recent months, a great deal of progress has been made in combatting high levels of post-pandemic inflation," writes Rick Rieder, BlackRock’s chief investment officer of global fixed income. "Still, the likelihood is that most of the meaningful progress is behind us at this stage, and inflation may remain sticky at levels higher than the Federal Reserve would ideally like."

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