US inflation is currently stuck “somewhere between 2.5% and 3%,” as analyst Stephen Auth, CIO of equities at Federated Hermes, says, and that, among other things, greatly complicates the path of the Federal Reserve to continue cutting interest rates. In December, the consumer price index (CPI) rose two tenths to 2.9% year-on-year, as expected. The core CPI, which excludes energy and food, more persistent in recent times, eased by a surprise by one tenth to a still high 3.2%. On a month-on-month basis, the general CPI flies up to a high 0.4% and the underlying CPI relaxes to 0.2%.
Eager for good news regarding inflation for some time now, Wall Street has launched into celebrating the small relief in the underlying indicator. The yield on the 10-year Treasury bond has fallen from 4.75% to 4% and the dollar showed slight declines against the euro. Along the same lines, Wall Street futures showed increases of over 1% as soon as the report from the Bureau of Labor Statistics (BLS) of the Department of Labor was released. However, beyond this reaction, it is clear that the path for the most watched central bank on the planet to continue lowering rates is increasingly narrower.
“The weaker-than-expected core CPI data offers some hope, especially after last Friday’s strong employment numbers, that the Fed can still cut interest rates in 2025,” explains Skyler Weinand, director of Regan Capital investments. The aforementioned employment report surprised with the power shown in job creation and put expectations of rate cuts this year to a minimum. The markets began to discount only one and in the second half, while some analysis houses erased any prospect of cuts and others directly pronounced the ‘damned’ word: increases.
Beyond the speculation made by operators and whether the Fed will cut this year or so, the general message is that inflation has settled at 3% as the ‘new normal’ after the pandemic and the war in Ukraine . Analyzing the December data in detail, the main culprit of the rebound was gasoline, which registered an increase of 4.4% month-on-month after 0.6% and the three previous negative data. Transportation services, with 0.5% monthly and 7.3% year-on-year, have also been protagonists for the worse. Housing, an essential category in the weighting of the index, has remained at a still ‘hot’ 0.3% month-on-month, yielding a still high 4.6% year-on-year.
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