Today, the CPI data for December 2023 is about to be unveiled, and it will be the first CPI report released in 2024.
If rate hikes was the key term that pervaded throughout last year, then the key term for this year has to be rate cuts: whether the Federal Reserve will cut rates this year, when will it cut, and how much it will cut- every one of these questions is stirring up the market's nerves. Tonight's first CPI data of the year could serve as an important reference to answer these questions.
CPI Is About To Rebound, But Core CPI Will Continue Its Slide
In view of FactSet's data, the overall CPI for December will increase by 3.2% year-on-year, a tad higher than November's 3.1%. On a monthly basis, analysts predict December's CPI will grow 0.2%, also higher than November's 0.1%.
However, excluding food and energy, the core CPI may continue the trend of the past few months. The year-on-year growth rate of core CPI last month is estimated at 3.8%, and the monthly growth rate is at 0.25% - both of which will be lower than in November.
Andrew Patterson, the senior international economist at Vanguard Investment Strategy Group, highlighted that Prices continue to fall at a rapid clip. However, this downward trend, according to him, will not aid the Federal Reserve to attain a 2% inflation target before the end of this year. Contrarily, achieving this milestone might have to wait until the beginning of 2025.
Housing, Used Cars, And More
Meanwhile, Goldman Sachs' economists emphasize that car prices, airfare, and housing will be the three focus areas in this CPI report. They specify that car and housing prices continue to decline, but airfare is likely to pose an upward risk in the December report.
November last year saw an increase of 0.5% in overall rent costs in the US, a 6.9% increase year-on-year, accounting for nearly 70% of this month's CPI increase. Despite this, industry statistics indicate that the home vacancy rate in the United States in the third quarter reached a new high in more than two years.
Consequently, due to increased rental costs and more apartment buildings preparing to open, extensive downward pressure on rental prices is highly likely in the near term.
Used car prices are also likely to drop again after November. In November of last year, the Manheim Used Car Wholesale Price Index fell by 0.5% in the month and declined by 7% year-on-year. Since last year, used cars have been a major driver of the overall downward trend in inflation.
However, Goldman Sachs also believes that airfare could offset the effects of declining house and used car prices to some extent. Pricing measures in the aviation industry last month might lead to a more than 5% increase in airfare in December, making a three basis point contribution to the core CPI.
The CPI report may give clues about the timing of rate cuts.
The main focus of the CPI report is its reference significance for the Fed's rate cut prospects. The market at present believes that the Fed will cut the rate around five times in 2024.
Analysts at UBS believe that even if core inflation rises slightly from November, it will not change the Fed's direction for rate adjustments, saying, Inflation has clearly decelerated faster than the FOMC anticipated.
Nonetheless, analysts at Bank of America added that should the actual core CPI report be higher than expected, it could keep the Fed on hold again and potentially delay rate cuts to later this year.
CPI data for December has a certain amount of asymmetric risk, Steve Sosnick, Chief Strategist at Interactive Broker, commented. I believe a good, or above-expected number, is already baked into market expectations, but I don't think the current accelerated inflation situation is within market expectations.