Lending Association

US inflation in December: A reality check for markets

A timely reminder to markets: don’t get too ahead of reality when it comes to US inflation. December’s Consumer Price Index (CPI) revealed a higher-than-forecast reading.

US headline inflation rebounded slightly to 3.4%, up from November’s 3.2% and market forecasts for a 3.2% result, according to data from the Bureau of Labor Statistics.

Month-on-month inflation rose 0.3% in December, significantly faster than the 0.1% rise in November. This result won’t cause the US Federal Reserve any heartburn when it meets on January 31 – February 1, except to reinforce the message that interest rates won’t change until the central bank is very sure that inflation has weakened back to the 2% target or lower.

So, “higher for longer” is the mantra, and the idea of an early Fed pivot to rate cuts remains in abeyance.

Still, the fall from the 6.5% reading in December 2022, without a recession, to the 3.4% last month is impressive and confirms the plaudits the Fed is getting for achieving what is so far a very soft landing.

US inflation peaked at 9.1% in June 2022, so the outcome for December, while higher than expected, was also a good result from the 11 rate rises since March 2022, four of which came last year. In fact, the Fed hasn’t lifted rates since July.

December’s core CPI, excluding volatile food and energy prices, came out in line with expectations at 3.9%, down from 4.0% in November. That was slightly higher than the 3.8% forecast and again pointed to sticky—yet easing—inflation pressures.

Despite an initial sell-off and a slight nudge upwards in bond yields to 4.045%, stocks recovered some of those losses towards the end and then dipped back into the red in the final few minutes.

The 10-year T-bond yield dipped back under 4% to trade around 3.989%, a significant move given the earlier rise.

Andrew Patterson, Senior International Economist at Vanguard, commented, “While headline inflation increased more than anticipated due to larger increases in food prices, Core CPI was within our range of expectations. We will be keeping a close eye on services inflation going forward as deflation from goods is likely to level off. Within services, shelter prices ticked up a bit due to lodging away from home, suggesting travel remains robust. Medical services picked up a bit and will remain a focus for us going forward given tightness in the labor market there.”

Cleveland Fed President Loretta Mester said in an interview with Bloomberg TV that the CPI report “just shows there is more work to do, and that work is going to take restrictive monetary policy. I think we need to see more evidence before reducing interest rates, with a March rate cut, currently anticipated by financial markets, being ‘too early in my estimation.'”

In separate comments, Richmond Fed President Thomas Barkin said the December inflation report was “about as expected,” with prices rising slowly for goods, but shelter and services costs still increasing at a more vigorous pace.