Contents
The latest developments in the US Consumer Price Index (CPI) data have introduced uncertainty into the expectations of an early Federal Reserve rate cut, following a dovish shift in December. Despite market speculations for a March cut, the robust job market and unexpectedly firm US CPI numbers in December suggest a delay until at least May.
Highlights:
- Recent US Consumer Price Index (CPI) data surprised analysts with unexpectedly firm numbers, casting doubt on the likelihood of an early Federal Reserve rate cut.
- The Federal Reserve is more likely to wait until May to make any potential adjustments to interest rates.
- Despite the disappointing CPI figures, there are still reasons to be optimistic about inflation moderating in the coming months.
- The core personal consumer expenditure deflator (PCE), the preferred measure for the Federal Reserve, has consistently shown better performance than the CPI.
- There are signs that housing inflation and used car prices are starting to slow down.
- The NFIB small business survey reveals a decrease in US businesses raising prices.
- By late second quarter, there is a good chance that headline and core US CPI will stabilize in the 2-2.5% year-on-year range.
US CPI Resilience Surprises Analysts in December
In December, the US CPI exceeded expectations with a month-on-month increase of 0.3% and a year-on-year rise of 3.4%. The core US CPI, excluding food and energy, also saw a notable increase of 0.3% month-on-month and 3.9% year-on-year, surpassing the anticipated 0.2/3.2% for headline and 0.3/3.8% for the core. While not a significant miss, these US CPI numbers, coupled with lower-than-expected initial and continuing jobless claims, cast doubt on the likelihood of a March rate cut.
Inflationary Plateau and Economic Indicators
The annual rate of headline inflation in the US has climbed to 3.4%, up from 3.1% in November, indicating a potential plateau after a strong disinflationary trend in the first nine months of 2023. Key factors such as housing, used cars, airline fares, and medical care continue to exert upward pressure on US CPI. The so called super-core measure, emphasizing tightness in the US labor market, posted a 0.4% month-on-month increase. With the US economy likely to show 2-2.5% GDP growth in the fourth quarter, the Federal Reserve seems inclined to wait until May for any rate adjustments.
Divergence in US Inflation Measures
While the US CPI report is a crucial metric, the Federal Reserve also considers the core personal consumer expenditure deflator. Despite the US CPI’s uptick, the core PCE deflator, the preferred measure for the Federal Reserve, has consistently shown better performance. Methodological differences in calculations, particularly in component weights, contribute to the observed divergence. Nonetheless, the outlook for US consumer price inflation returning to a 2% year-on-year rate remains promising.
Optimism Despite Disappointing US CPI
Observations of private sector rents in the US indicate a potential slowdown in housing inflation, and declines in Manheim car auction prices suggest upcoming decreases in US used car prices. The NFIB small business survey reveals a decrease in US businesses raising prices, offering optimism for sustained lower US inflation rates in 2024. While the latest US CPI report may not have been as favorable as expected, there are still reasons to be hopeful, with a good chance of headline and core US CPI stabilizing in the 2-2.5% year-on-year range by late second quarter.
Conclusion
In conclusion, the challenges posed by the recent US Consumer Price Index (CPI) data have tempered expectations for an early Fed rate cut. The intricate interplay of US economic indicators suggests a cautious approach, with May emerging as a more likely timeframe for any potential adjustments by the Federal Reserve. Despite the disappointing US CPI figures, a broader analysis reveals optimistic signs for a controlled inflation trajectory in the coming months.
