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Both US headline and core inflation printed at 0.3% MoM in December, with the former landing 0.1pp above expectations and the latter in line with the economist consensus. Although this outcome isn’t necessarily disruptive for markets seeing as the implied path for Fed easing this year has already been reined in over the past week, the headline measures mask a lot of the underlying strength in the data, with the details of December’s report reading much firmer in our view.

This was visible in the unrounded numbers, with headline inflation rising from 0.097% in November to 0.303%, while core inflation also ticked up from 0.285% to 0.309%. This meant the 3-month annualised rate of core inflation has held firm in the 3.3-3.4% range for the entirety of the fourth quarter, which if sustained, should effectively halt the pace of disinflation evident in the year-on-year rate. This is already starting to show, with the annual core measure of inflation falling just 0.1pp on the month to 3.9%. Should disinflation in the core measure stall at these elevated levels, doubts over the Fed’s ability to cut rates in Q1 as per current market pricing are likely to arise.

This would see money market pricing align with our base case, which doesn’t foresee a rate cut until late Q2, however it seems as if today’s inflation report landed too early for markets to give up hope of renewed progress on disinflation.

Details of December’s CPI report were strong

The details of December’s inflation report suggest the Fed will struggle to find room to cut rates as soon as markets imply. Granted the monthly pace of both rent and OER fell in December, from 0.48% and 0.50% to 0.42% and 0.47% respectively, and the Fed’s supercore measure of inflation fell from 5.2% to 4.2% last month, both these measures distract from the fact that underlying core inflation remains much hotter than suggested. For example, the drop in the supercore rate of inflation merely reflects the outcome of October’s fall in core services inflation, from 0.57% in September to 0.34% in October. However, the October print scans as anomalous, with the 3-month average pace of core services inflation actually sitting 10bps higher at 0.45% once removing it, in line with the Q3 average monthly print of 0.44%. Therefore, if the current inflation momentum is sustained in January, the supercore measure of inflation should jump back up to 5.2%, undermining any argument that disinflation progress was sustained at the end of 2023. Furthermore, measures of services inflation that are closely linked to the labour market also printed hot. Recreational services inflation jumped to 1.1% in December, while hospitality inflation continued to track above 2% on an annualised basis.

The Fed’s supercore measure of inflation only showed disinflation because of October’s anomalous drop-off in inflation 

While central bank policymakers and markets place a lot of emphasis on core services inflation, and rightly so given its truer reflection of domestically generated inflation pressures, it was notable that the deflation trend in core goods was also halted in December. Yet again this can be boiled down to an uptick in used car and truck prices, which increased by 0.5% on the month, but it was also notable that new vehicle prices also increased by 0.3% MoM having spent much of the past year falling outright.

Although we are hesitant to place too much emphasis on single monthly data points due to their level of volatility, if sustained, price growth in new vehicles isn’t necessarily suggestive of improving supply chains and weakening consumer demand, both of which were key drivers of the disinflation seen over the past year.

Markets unwilling to revise priors 

Despite notable strength in core and supercore month-on-month measures, market pricing of the Fed’s easing path remained relatively unmoved following today’s data release, with the implied probability of a March cut holding at around 65-70% and a cumulative 150bps of cuts remaining priced for the year. This is inconsistent with the latest macro data, which over recent days showed consistent signs of greater inflation persistence than markets are appreciating. Money market price action instead reflects the market bias to try and front run the Fed’s easing cycle, based upon the prior that more disinflation progress is in the pipeline. While we tend to agree that further disinflation progress is in store on margin re-compression and continued normalisation in the labour market, we don’t expect it to be visible across the totality of the data the Fed is set to receive by March’s meeting.

As such, policymakers are unlikely to project inflation falling back to target with significant confidence, which is a prerequisite for the commencement of the easing cycle. However, with another two inflation and labour market reports set to be released ahead of March, a significant adjustment in the Fed’s implied easing path is unlikely until mid-February.

Market pricing of a March cut was virtually unmoved by today’s inflation report



Simon Harvey, Head of FX Analysis


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