US CPI inflation marginally stronger than expected

Market participants’ attention has recently been focused squarely on US inflation. It is easy to see why: a continued decline in inflation towards the Fed’s 2% objective will give the Fed room to cut interest rates. And the faster inflation falls, the faster the Fed is likely to cut rates.

On 11 January, the Bureau of Labor Statistics (BLS) released the CPI data for December. Headline inflation was 0.3% month-on-month (MoM) and 3.4% year-on-year (YoY), and core inflation was 0.3% MoM and 3.9% YoY. In both cases inflation was a little higher than hoped for: expectations had been for headline inflation of 3.2% and core inflation of 3.8% YoY.

Table 1

Source: BLS. Data as of 11 January 2024.

While the BLS focuses on inflation over one or 12 months, it can be useful to look at inflation over an intermediate horizon, such as six months. Inflation measured over this time horizon provides a more up-to-date sense of inflation pressures, without being as erratic as inflation rates measured over one month.

Furthermore, while there is much attention paid to headline and core inflation, core inflation has been slower to subside, partly because of the way housing costs are measured. Fed chairman Powell has in the past commented on a measure of services inflation excluding shelter.

In the figures below we show headline, core and a measure of core inflation that excludes shelter over 12 and 6 months (annualised). All three measures have declined in 2023 and super core inflation is only slightly above the Fed’s 2% objective. Furthermore, measured over six months, while headline and core inflation are marginally above 3%, core inflation ex shelter is clearly below 2%. Current inflation pressures are therefore more modest than indicated by 12-month inflation rates.

Chart 1a. Inflation year-on-year

Chart 1b. Inflation 6m annualised

Source: BLS and EFG calculations. Data as of 11 January 2024.

Overall, the BLS data show that in December inflation pressures in the US subsided less rapidly than market participants expected. They suggest that the Fed is unlikely to cut interest rates in March and rather wait until later in the spring. Nevertheless, the overall view that inflation pressures are abating in the US and interest rates will be cut at some point in 2024 remains unchanged.

Once the policy path is clearer and the timing of the first rate cut solidifies, this should support asset prices in 2024.