Evening Brief – 01.11.24
Still “Sticky”
The consumer price index rose 0.3% in December and 3.4% year on year, compared with expectations of 0.2% and 3.2%, respectively. Core CPI, meanwhile, increased 0.3% month on month and 3.9% year on year, compared with expectations of 0.3% and 3.8%, respectively.
The higher-than-expected prints were driven by shelter inflation, which not only accounted for more than half of the “all items” increase but was also the greatest factor in the monthly core item increase.
“The report underscores the fact that market participants had gotten a little overexcited around the timing of rate cuts. These are not bad numbers, but they do show that disinflation progress is still slow and unlikely to be a straight line down to 2%. Certainly, as long as shelter inflation remains stubbornly elevated, the Fed will keep pushing back at the idea of imminent rate cuts,” said Seema Shah, Principal Asset Management.
Perhaps more troubling for the Federal Reserve and those expecting a rate cut soon is that core CPI services ex-shelter (SuperCore) climbed 0.4% in December, raising the year-over-year rate to 4.09%. This is an area closely watched by Fed Chair Jerome Powell and other policymakers.
While the market struggled for direction on Thursday, Wall Street experts’ reaction was more muted. The fact that this category looks to have bottomed out does not bode well for the Fed at the moment. As Bloomberg notes: “there were soft readings from April to July, but it’s picked up again unfortunately for policymakers.”
Still the overall trajectory remains lower, which is why market expectations for 2024 rate cuts did not really move all that much. Today’s inflation data is a reminder that bringing it back to the Fed’s 2% objective will take time. With core inflation still near double the Fed’s target, it’s enough to sow doubt that the FOMC will begin to cut interest rates as soon as the March meeting.
“Today’s increase in the rate of inflation will be a change that will likely be interpreted by the market as unwelcome, but unsurprising. It looks like the market may have jumped the gun in penciling in as many as six Federal Reserve rate cuts in 2024,” added Richard Flynn, managing director at Charles Schwab.