Inflation Data Mixed, Fed Still Expected to Cut Rates Twice This Year — Evening Brief – 01.15.25
The Consumer Price Index increased 0.4% in December, the highest month-over-month reading since March. The print was as expected by most economists but somewhat faster than the previous month’s 0.3% gain, according to the US Bureau of Labor Statistics. This is a 2.9% year-over-year increase (the highest rate since July). The yearly print again met forecasts, but it was higher than the November reading of 2.7%.
Energy prices increased by 2.6% in December, contributing to nearly 40% of the monthly rise, while the gasoline index surged by 4.4% during the same period. Food prices rose by 0.3%, with both the index for food at home and the index for food away from home increasing by 0.3%.
The Core CPI, excluding volatile food and energy costs, rose by 0.2%, which was lower than anticipated, following an increase of 0.3% during the preceding four months. The most recent reading fell short of the 0.3% consensus and the +0.3% recorded in November. The annual core measure increased by 3.2%, a decrease from 3.3% in November and below the anticipated 3.3% rise.
“While the inflation data has taken a turn for the worse in recent months, the report is a reminder that the overarching trend is still to the downside,” Bryan Jordan, Cycle Framework Insights, Inc chief strategist, shared in an email with Connect. “The disinflation process has played out erratically to this point and, given the ongoing crosscurrents, is a good bet to remain jagged for the foreseeable future.”
The dip in Core CPI is indeed good news; however, Supercore or Services CPI ex-Shelter, which the Fed closely watches, is still sticky. The index rose 4.3% annually versus 4.3% in November and +3.9% at the end of 2023.
“The still elevated annual rate of inflation, the strength in the labor market, and the prospect of changes in tariff and immigration policies that could push inflation higher will keep the Fed cautious and patient with regards to cutting rates further,” Nationwide chief economist Kathy Bostjancic wrote in a note to clients.
The subdued core inflation data induced a modest shift in interest rate expectations, with the market currently assigning the strongest likelihood of another quarter-point rate cut (43.8%) in June, succeeded by another cut in July (42.8%), according to the CME FedWatch Tool. CPI remains elevated although the data provided some reassurance today that the trend remains down as U.S. equities surged and U.S. Treasury yields tumbled.
“Inflation improved meaningfully in 2024, although it did not slow enough to meet the Fed’s target or satisfy consumers weary from the big cumulative price increases of the last few years,” Comerica chief economist Bill Adams said, adding that the Fed might reduce the speed of rate reductions as the outlook on inflation becomes more uncertain.