On Thursday at 8:30 a.m. ET, the latest inflation figures are poised for release, becoming a pivotal factor for investors seeking insights into the Federal Reserve’s potential interest rate adjustments. Forecasts for the December Consumer Price Index (CPI) suggest a marginal uptick in annual headline inflation to 3.2%, compared to the previous month’s 3.1%. However, excluding volatile food and energy categories, economists anticipate a decrease in “core” inflation to an annual rate of 3.8% from the previous 4.0%.
Investors keenly await these figures as they gauge the possibility of a soft landing, where inflation retreats to 2%, potentially prompting the central bank to conclude its interest rate hiking campaign. If such a scenario unfolds, it could pave the way for rate cuts, lowering borrowing costs for businesses and consumers.
Anticipations:
Bank of America economists anticipate slightly higher readings for both headline and core inflation than the consensus. Even with “core” CPI at 3.9% in December, there remains a possibility of a Fed rate cut in March, according to the BofA economics team. The Fed’s potential trajectory includes a 25 basis point cut in March, followed by quarterly reductions throughout the year, totaling 100 basis points.
As of Wednesday, markets reflected a 67% likelihood of a Fed interest rate cut in March, based on the CME FedWatch Tool. On a monthly basis, economists project a 0.2% increase in prices for December, compared to the previous month’s 0.1%. Core inflation is expected to rise by 0.3% month over month, unchanged from November.
Key areas to watch, highlighted by economists at Goldman Sachs, include car prices, airfares, and shelter. While car prices and shelter are anticipated to continue their downward trend, airfares pose a potential upside risk in the December report. Goldman’s real-time price measures indicate a notable increase in airfare prices, potentially contributing to a 5% rise in December airfare prices and a 3 basis point addition to “core” CPI.
Inflation up more than expected in December
Gradual Balance:
Looking ahead, Goldman foresees further disinflation in 2024 due to rebalancing in the auto, housing rental, and labor markets, offsetting slightly by a delayed acceleration in healthcare. The research note from economists Manuel Abecasis and Spencer Hill projects year-over-year core CPI inflation of 2.9% and core Personal Consumer Expenditures (PCE) inflation of 2.2% in December 2024. Despite market expectations of interest rate cuts amid a declining market, Fed officials, including Governor Michelle Bowman and Atlanta Fed president Raphael Bostic, have expressed a more measured stance.
