Thursday’s U.S. consumer price report for December will provide a preview of inflation trends for this year, which could decide the timing of interest rate cuts by the Federal Reserve. Although U.S. Dec CPI is expected to tick up to +3.2% y/y from +3.1% y/y in Nov, the core Dec CPI (ex-food and energy) is expected to slip to a 2-1/2 year low of +3.8% y/y from +4.0% y/y in Nov.
The December CPI report should show that goods prices overall have stopped rising, and some, like automobiles, are falling. UBS Investment Bank said, “This year is likely to be very soft, and we expect to see a lot of slowing of price pressures in the near term and a more gradual slowing further out.” Wells Fargo & Co said inflation went up faster than models and past experience would have predicted, and now it may also go down faster than anticipated.
Over the past few months, inflation has fallen faster than economists and the Fed expected, boosting expectations for the Fed to begin cutting interest rates this year. The markets are discounting the chances for a -25 bp rate cut at 5% at the next FOMC meeting on Jan 30-31 and 68% for that same -25 bp rate cut for the following meeting on March 19-20. The markets are not fully discounting the chances of a -25 bp rate cut until the April 30-May 1 FOMC meeting.
The minutes of the December 12-13 FOMC meeting showed policymakers debated on whether supply-chain improvements could continue to provide relief for prices. However, other components of the consumer price index, including services, are still rising. Shelter inflation, the largest component of the CPI that accounts for almost a third of the index, peaked at 8.2% in the 12 months through March 2023, well above the typical 3% to 3.5% range in the years before the pandemic. The price of shelter inflation has decelerated to 6.5% in November and is expected to decline further, although the progress has been slow in part because people see a change in their rents only when their lease is renewed or when they move.
Recent consumer surveys have shown improvements in sentiment about the outlook for inflation due to a decline in gasoline prices in the last quarter of the year. The University of Michigan’s Dec 1-year inflation forecast fell to 3.1%, a nearly 3-year low. However, strength in the U.S. labor market could limit any substantial decline in inflation this year, with the Dec unemployment rate at 3.7%, just above the 54-year low of 3.4%. Fed Governor Bowman warned that a strong labor market could keep core services inflation high and said, “There is a risk that the recent easing in financial conditions encourages a reacceleration of growth, stalling the progress in lowering inflation, or even causing inflation to reaccelerate.”
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
