Just last week, producer prices indicated a stalling out at the wholesale level. Fortunately, or unfortunately, what happens in prices at the consumer level often lags the wholesale level. Now, the Consumer Price Index (CPI) is showing that inflation is at the 2.0% to 2.5% target range that was set by Federal Reserve Chair Janet Yellen.

Wednesday’s report from the U.S. Department of Labor showed that the CPI was up 0.3% in December, on the monthly reading for the headline report. The core CPI, which excludes food and energy, was up just 0.2% on the monthly reading in December.

Where inflation is looking better is on the year-over-year reporting, and that is what the Fed and economists really look at. The headline CPI report for December was up 2.1% from December of 2015. December’s core CPI reading was up 2.2% year over year.

There have been many months in which one of the indicators was challenging the 2.0% annual reading. In this report, the annual readings are both above the 2.0% target. What matters here is that this should offer Yellen and her Fed cohorts on the Federal Open Market Committee (FOMC) more than enough cover to justify its next interest rate hike.

One explanation is coming from energy prices, and we should at least keep in mind that energy’s rise is off of incredibly low levels. In late 2015, a barrel of oil was down in the $30s, and now it is up in the $50s. Energy prices rose 1.5% in the month of December, and this was the fourth straight monthly gain. Its annual gain rate was exceeding the overall inflationary trends handily, at about 5.4%.

Medical costs had been running hot, but the 0.2% gain in December made for a 4.1% gain on the annual reading. Housing costs were up 0.3% on the monthly reading in December, but that was up 3.0% from a year earlier.

Two areas that continue to lag are food and apparel. Food prices were flat in the December’s monthly reading and down 0.2% from a year earlier. Apparel costs were down 0.7% in December’s monthly reading and finished the year at −0.1%.

If Yellen sees another report like this, it seems safe to at least wonder if the next interest rate hike may come sooner than expected. Federal funds futures went out in December at a 0.50% to 0.75% target range, with just one rate hike in 2016. The prior consensus from the Federal Reserve’s “lower rates for longer” accommodative mantra was then ratcheted higher from two rate hikes expected in 2017 to three expected. Now we just have to see if the slower gains in producer prices in December, which were released a week earlier, will translate to lower prices in the months ahead at the consumer level.

The CME’s FedWatch Tool still shows a 96% chance that fed funds would remain in the 0.50% to 0.75% range for the February 1, 2017, FOMC meeting. There is still just a 30.3% chance that we see a 0.75% to 1.00% range (versus 65.5% for the 0.50% to 0.75% range) at the May 3, 2017, FOMC meeting, but there is now a 482.% chance for a 0.75% to 1.00% fed funds range (versus 32.2% chance for 0.50% to 0.75% range) at the June 14 FOMC meeting.

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