It has been quite clear, at least to this blogger, that markets have been getting ahead of themselves in pricing in rate cuts by the US Federal Reserve. December CPI data, released today by the Bureau of Labor Statistics, confirm that the Fed still has work to do.
Headline CPI rose 0.3 percent in December as gasoline prices, which had been contributing to lower readings in recent months, showed little change. The year-on-year increase ticked up to 3.4 percent in December from 3.1 percent in November. Both the monthly and annual increases were in line with market expectations and are unlikely to have any major influence on the Fed's decision-making in the near term.
Core inflation, however, is a different matter. CPI ex food and energy rose 0.3 percent in December, the same increase as in November. This allowed the year-on-year rate to edge down to 3.9 percent in December from the previous reading of 4.0 percent. This is the smallest increase in year-on-year core CPI since May 2021. While that certainly counts as good news, it is still well above the Fed's inflation target, and the month-to-month changes, which annualize to almost 4 percent, clearly suggest that core inflation is proving to be stickier than the headline measure.
The Fed's regularly stated position that it will only start cutting rates when it is sure that inflation is heading sustainably back to the 2 percent target. The fact that the US economy still seems to be firing on all cylinders means that there is no need to start the cutting cycle prematurely, whatever the markets may think. For now, the 75 basis points in cuts foreseen in the latest "dot plot" still seem like a reasonable projection, but the first cut is unlikely to arrive much before mid-year.
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