Consumer prices accelerated in December.

Given the increase in market expectations for rate cuts to begin in March, we will be focused on the economic condition set that would likely need to be met to justify Fed rate cuts based on measures they have indicated are important to their policy decisions. Last week we received an update on the Consumer Price Index for December, one of the inflation measures they rely on. On a seasonally adjusted basis, the Consumer Price Index (CPI) accelerated to 3.3% y/y in December, above the Fed’s target rate of 2.0%. Notably, the shelter component, which accounts for about one-third of CPI, was responsible for +2.1 percentage points of the 3.3% headline growth rate, thus the other two-thirds of the index would likely need to flatline or decline on a y/y basis to reach the desired inflation rate by the March FOMC meeting. In other words, there would have to be a sizable decline in demand in categories outside of shelter to bring the headline level down to 2.0% in such a short window. Historically, that pace of deceleration in inflation would be consistent with prior economic contractions and would be more in line with the view that the Fed is going to start cutting in March. Right now, however, the inflation data has not yet moved in a direction that would suggest the Fed is going to cut in March or cut six times by year end.

Source: Macrobond. 

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