Please see the below article from Evelyn Partners detailing their thoughts on the US CPI inflation announcement for December 2023. Received this afternoon 11/01/2024.
What happened?
US December annual headline CPI inflation rose at 3.4% (consensus +3.2%) and compares with +3.1% in November. On a monthly basis, CPI rose 0.3% (consensus +0.2%), compared to an increase of 0.1% in November.
Turning our attention to the core figure, which excludes volatile food and energy prices, the annual number came in at 3.9% (consensus 3.8%), compared to 4.0% in November. In monthly terms, core CPI increased 0.3% (consensus 0.3%), which compares to 0.3% in November.
What does it mean?
December’s inflation report came in slightly above forecasters expectations with headline CPI re-accelerating slightly to 3.4%. However, core inflation continued to ease, falling below 4% for the first time since May 2024 with today’s figure of 3.9%.
The index for shelter continued its recent trend upwards rising by 0.5% on the month, shelter accounted for over half of the overall monthly inflation figure. However, on an annual basis shelter inflation has slowed to 6.2% from its peak of 8.2% in March 2023. Having decelerated dramatically during October and November the index for energy increased by 0.4% for the month of December, as increases in electricity and gasoline were large enough to offset the decrease from natural gas.
The faster than expected deceleration of inflation seen during the final quarter of 2023 has prompted money markets to start to anticipate rate cuts as early as March 2024. This change in market sentiment was provided some credibility by dovish communication from the Federal Open Market Committee (FOMC). Despite holding the base interest rate unchanged at 5.25-5.5% during their December meeting, the committee changed its forward guidance to signal it now expects to cut rates three times during 2024. This marks a considerable change in tone from the September meeting, when the committee did not expect to cut interest rates at all this year.
Despite Non-farm payrolls beating consensus estimates in December and the unemployment rate remaining low at 3.7%, wage growth appears to be normalising to levels consistent with 2% inflation over time. At the start of November, Federal Reserve (Fed) chair Powell stated that wage increases have come down significantly and are now “substantially closer to that level that would be consistent with 2% inflation over time”. On top of this, US productivity has been improving, with annualised Q3 productivity growth at 5.2%. So, despite annual wage growth remaining elevated at 4.1%, companies are still being rewarded by higher levels of output per unit labour cost. This should mitigate some of the inflationary pressures typically expected from heightened wage growth.
Immediately following the report bond yields rose with the US 10-year treasury note gaining ~7bps
Bottom Line
Despite today’s report showing in aggregate, limited new disinflationary progress, over recent months there have been three key macro trends that, in our view, have reduced the likelihood of a US economic hard landing. First, the labour market has started to soften without a notable step up in the unemployment rate. Second, wage growth is starting to moderate towards levels that would be consistent with the Fed’s 2% inflation target. Third, inflation has been decelerating faster than many forecasters had expected.
Money markets are currently pricing in rate cuts as early as March, in our view, that may be too soon, but if the labour market and inflation data softens further over the coming months, then we think US interest rates are likely to begin falling as we get towards the summer.
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Alex Clare
11/01/2024