US inflation accelerated in December but was in line with expectations. The latest CPI data made the market expect that the Federal Reserve will continue to cut interest rates. The interest rate cut process may not be as pessimistic as anticipated before the data was released. This also helps prevent a sharp sell-off in the US bond market.

On Wednesday, January 15, data released by the US Bureau of Labor Statistics showed:

• In December, the CPI rose 2.9% year on year. The expected value was 2.9%, and the previous value was 2.7%. This is the highest level since July last year.

• The core CPI rose 3.2% year on year in December, lower than the forecast of 3.3%. The previous value was 3.3%.
• The 0.4% month-on-month increase in December was in line with expectations; the previous value was 0.3%. Of this, more than 40% of the increase came from energy.
• The core CPI rose 0.2% month-on-month in December, lower than the expected value and the previous value of 0.3%. Previously, the core CPI had been rising 0.3% month-on-month for four consecutive months.

• The Federal Reserve's favorite CPI indicator, supercore CPI, rose 0.28% month-on-month, slowing annual inflation to 4.17%.

Economists generally agree that core CPI data reflects potential inflation trends better than overall CPI, which includes frequently fluctuating food and energy costs.

CPI segmentation

In December, hotel accommodation prices fell, medical services increased less, and rent increases were relatively moderate, helping to curb that month's inflation data. Food prices, air tickets, new and used cars, auto insurance, etc. have contributed to the rise in CPI.

The cost of goods excluding food and energy rose slightly by 0.1% in December after rising 0.3% in November. If used cars are not included, commodity prices have declined.

Housing prices, the largest category in the service sector, rose 0.3% for the second month in a row in December. Equivalent rents for landlords and major residential rents both increased, after recording the smallest increase since 2021.

Excluding housing and energy, the price of services increased by 0.2%, the smallest increase since July last year, according to Bloomberg calculations. Federal Reserve officials emphasized paying attention to this indicator when evaluating the overall inflation trajectory.

Market expectations of the Fed's interest rate cut are heating up, and US stocks and US bonds have soared

After the release of the US CPI data for December, traders expect the Federal Reserve to further relax its policy. It is expected that the Fed will cut interest rates by the end of July, compared to September.

The US dollar index fell about 60 points in the short term to 108.72. USD/JPY fell 1% to 156.38.

US stock futures rallied in the short term, and Nasdaq 100 futures rose more than 1%.

US 10-year Treasury yields fell by about 13 basis points, as low as 4.6633% on the new day, and remained stable at 4.76% before the US CPI data was released at 21:30 Beijing time. The two-year US Treasury yield fell by about 10 basis points, as low as 4.2616% on the new day, and traded 4.34% at 9:29.

Spot gold rose by about 6 US dollars in the short term to 2684.50 US dollars/ounce.

Analyze reviews

This is the last report on inflation during Biden's presidency, and US prices have surged 20% cumulatively during his tenure. Trump will be sworn in next week. Economists generally expect that his tariff policy will put upward pressure on inflation, and consumer expectations have also recently risen.

Some analysts believe that after several months of rising inflation data in the US, the latest lower than expected CPI data will help restart discussions on progress in inflation. But Federal Reserve officials will need to see a series of sluggish data before they can be convinced of this. Until now, lingering inflationary pressure led to a sharp sell-off in the global bond market, and raised concerns that the Federal Reserve relaxed its policy too quickly at the end of last year.

Combined with last week's strong non-farm payrolls report, it is widely expected that the Federal Reserve will keep interest rates unchanged at its meeting later this month. However, more economists said that the report made it possible to cut interest rates in March of this year. For example, another cooling CPI report and weak non-farm payrolls appeared. Prior to the release of this CPI report, traders generally expected that interest rates would not be cut again until the second half of this year.

Nick Timiraos, a well-known journalist known as the “New Federal Reserve News Agency,” is less optimistic than the above. He said that the US CPI report released on Wednesday had little impact on the prospects for the Federal Reserve to suspend interest rate cuts. The mixed data could not indicate the direction of inflation. It is expected that the Federal Reserve will continue to stand still this month, and more data is needed to determine the next steps.

The personal consumer spending price index (PCE), which is favored by the Federal Reserve, doesn't pay as much attention to housing as the CPI report, which is one reason it is closer to the Federal Reserve's 2% target. The PPI report released yesterday shows that several categories related to PCE calculations are basically the same, but PPI's ticket price index has risen markedly.

After the CPI report was released, several economists expected the US core PCE to rise 0.2% in December. Bloomberg economists said the December core CPI data was unexpectedly weak, which made people believe that the cooling of inflation is continuing. Based on this month's PPI data, we believe that the core PCE deflator, or the inflation index preferred by the Federal Reserve, will be announced at a rate consistent with policymakers' 2% price target. The US core PCE data for December will be released at the end of this month.

Although US retail sales, inflation expectations, and real estate market data will be released in the next two weeks, this CPI report is the last major economic report that Federal Reserve officials saw before the January 28-29 meeting.