Today’s U.S. December consumer price report came in right on expectations, bolstering the case for the Federal Reserve to slow its pace of interest rate hikes to +25 bp at the Jan 31-Feb 1 FOMC meeting. The Dec CPI report of -0.1% m/m and +6.5% y/y was right in line with market expectations. The +6.5% y/y gain was the smallest in 14 months. Also, Dec CPI ex-food and energy rose +0.3% m/m and +5.7% y/y, right on expectations, while the +5.7% y/y gain was the smallest in a year.
Since posting a 41-year high of +9.1% y/y in June 2022, the U.S. CPI on a year-on-year basis has fallen for six consecutive months. Several factors have contributed to an easing of consumer price pressures. A surge in Covid infections in China has led to a slump in commodity prices. Also, an easing of supply chain constraints has reduced transport costs. In addition, discounts from retailers to clear excess inventories have knocked goods price lower.
Prices of new and used cars are moving lower as improvements in supply and production have helped rebuild auto inventories. Also, several goods sectors such as furniture, apparel, toys, and recreational goods have excess inventories, which has led to markdowns in prices that have led to lower consumer prices.
On the stronger side, core services prices ex-shelter, a category Fed Chair Powell singled out as one to watch for signs of durable disinflation, rose last month. The core services gauge, excluding shelter, rose +0.3% m/m in Dec, higher than the +0.1% m/m increase in Nov. Also, removing medical care costs as well, an adjustment that helps offset a quirk in the CPI’s calculation of health insurance, service prices were up by a similar amount.
Today’s CPI report was positive news for the Fed, and it paves the way for the Fed to possibly downshift to a +25 bp rate hike at the next FOMC meeting on Jan 31-Feb 1. Philadelphia Fed President Harker said today, "In my view, interest rate hikes of +25 bp will be appropriate going forward." Also, Boston Fed President Collins said she's leaning toward supporting a +25 bp rate hike at the February FOMC meeting.
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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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