US inflation outstrips forecasts with rise to 3.4% for December

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US inflation outstripped forecasts in December, hitting 3.4 per cent on an annual basis and dimming market expectations that interest rates would fall as soon as March.

Economists had expected a rise of 3.2 per cent, up from 3.1 per cent in November.

The core rate also came in higher than economists had hoped, in an apparent vindication of the US Federal Reserve’s caution over cutting rates from their 23-year-high.

US stocks fell following the data showing a headline 3.4 per cent annual rise in consumer prices. The blue-chip S&P 500 and the technology-heavy Nasdaq Composite both declined 0.4 per cent in New York.

Trading in the bond market was choppy. The two-year Treasury yield, which moves with rate expectations, rose immediately following the publication of the data, but later reversed that move, leaving the yield at 4.33 per cent, roughly where it was when the data was released.

In the futures market, traders slightly reduced expectations that the Fed would cut rates in March. 

Rate setters have said that they want to be confident that inflation was moving towards their 2 per cent goal before dialling back on high interest rates.

“You’re not supposed to react to one data point. But in this case, the Fed is looking for a signal to start. And, with this CPI report, the starting gun didn’t go off,” said Vincent Reinhart, a Fed veteran who is now at Dreyfus and Mellon. “After this, the Fed can’t use their meeting at the end of January to hint that they want to act in March. It’s going to take another round.”

Loretta Mester, president of the Federal Reserve Bank of Cleveland, said in an interview with Bloomberg Television that Thursday’s data showed there was “more work to do” and reiterated her stance that March was too early for rate cuts.

However, Mester cautioned against reading too much into the December consumer price index release.

“We don’t want to see the progress in inflation stall out, but I don’t think this report suggests that’s happening. It just suggests we have more work to do, and we’re committed to doing it.”

The CPI number is not rate-setters’ preferred measure of inflation, with most on the Fed’s monetary policy committee focusing on the personal consumption expenditures index.

The PCE figure for December comes out on January 26, just five days before the Fed’s next policy vote, and could show a lower inflation reading as it places far less weight on changes in the cost of shelter. Those costs rose 0.5 per cent month-on-month, according to Thursday’s CPI report.

Core CPI, which excludes food and energy costs, was 3.9 per cent for the year to December, slightly lower than the 4 per cent figure for November, according to the data published by the Bureau of Labor Statistics. But economists had expected 3.8 per cent.

The month-on-month core rate, a crucial measure of underlying inflationary pressures that the Fed watches closely, was unchanged at 0.3 per cent.

“Contrary to what we’re seeing in PCE — which is being held down by some technical factors — the trend in core CPI remains incredibly robust. There is no slowdown there,” said Alisher Khussainov, head of inflation at Citadel Securities. “The Fed and markets are happy to take solace in the PCE numbers, but CPI is telling us a different story.”

Despite the uptick in December, price pressures fell much more sharply than expected in 2023, prompting the White House to note that inflation was now down about two-thirds from the peak seen during the summer of 2022.

“We saw prices go down over the course of the year for goods and services that are important for American households like a gallon of gas, a gallon of milk, a dozen eggs, toys, appliances, car rentals and airline fares,” said US President Joe Biden. “Despite what many forecasters were predicting a year ago, inflation is down while growth and the job market have remained strong.”