December inflation should keep the FED patient

The December consumer price index (CPI) accelerated by 0.3%, slightly higher than expected, bringing the annual rate of inflation to 3.4% from 3.1% in November. Also, core CPI inflation, which excludes food and energy, increased by 0.3%, although in line with expectations. However, in its annual variation, it decelerated to 3.9% (versus 4.0% in November and October). Therefore, the overall trend shows that core CPI continues to moderate gradually. According to these data, analysts believe that the FED’s preferred price index, known as the “Core Personal Consumption Expenditures Price Index (Core PCE)”, would have increased by 0.2% last month, which would bring the annual variation from 3.2% to 3.0% (vs. 2.4% expected for the end of this year).

Within the report, the monthly performance in the energy component came as a surprise, higher than expected, with an increase of 0.4% (-2% annually), driven by a 1.3% increase in electricity prices (+3.3% annually). Meanwhile, food CPI rose 0.2% (+2.7% annually), in line with recent increases. Food away from home increased 0.3% (+5.2%), which implied a slight improvement over what was seen in previous months.

In other categories of interest, new vehicle prices advanced 0.3% in the month (+1% annually), while used vehicle prices climbed 0.5% (-1.3% annually), although used vehicle prices are expected to moderate again in the coming months. Basic services prices (excluding energy services) advanced 0.4% last month (+5.3% annually). That said, shelter-related increases, which have a significant weight, continue to moderate at a very gradual pace. In this sense, rents increased 0.5% (+6.2% annually), a similar performance to the previous month. Finally, prices for health care services rebounded 0.7% last month (-0.5% annually), pressured by another increase in the cost of insurance.

With all key data now available (inflation and employment), we believe that the Fed would not be in a hurry to accelerate cutbacks to the reference rate, as there is still room for improvements, especially concerning Core CPI. Moreover, it is challenging to think that the upcoming FOMC meeting at the end of January can provide further clues about how the Fed might act in the very near term. What can be anticipated is that the talk of higher rates for a while should prevail until a more pronounced cooling within the economy is observed. Finally, it is worth noting that, despite all of the above, the consensus assigns a 69% probability of seeing a 25-basis point (bp) cutback at the subsequent meeting on March 20th.

Change (%) in the last twelve months in CPI and Core CPI

Source: U.S. Bureau of Labor Statistics

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