Inflation Outlook: Disappointing News for Investors

Base Effects and Monthly Growth

Impact on Fed Policymakers

Potential Risks and Concerns

A Look at Core CPI

In conclusion, while the latest inflation reading might disappoint some investors hoping for a rate cut, it is crucial to consider the broader economic factors at play. Increased headline inflation could strengthen the argument for maintaining the current high federal-funds rate, as policymakers aim to achieve price stability and prevent a resurgence of inflation.

Inflation Remains Above Target, But Moderation Could Be on the Horizon

The latest data on inflation shows that while the rate has decreased from its peak in December 2022, it is still almost double the Federal Reserve's 2% target. According to J.P. Morgan strategists, even though housing costs are expected to stabilize, there could be a slight increase in prices for goods, which may keep core CPI inflation steady at around 3%.

In December, the monthly core inflation rate is projected to slow to 0.2%, compared to 0.3% in November, according to FactSet.

The rise in headline inflation is primarily driven by increased prices in various sectors that have outpaced the decline in gasoline prices. Despite gas prices reaching a national average of $3.09 by the end of last year, the cost of used cars surprisingly jumped in December. Additionally, medical goods and services prices saw an uptick, along with continued increases in car insurance costs, as reported by James Knightley, ING's chief international economist. Moreover, Knightley expects that the cost of housing remained firm last month.

The "supercore" inflation measure, which excludes energy and shelter, is also expected to exhibit some strength. Fed policymakers view this metric as crucial because it provides greater sensitivity to the labor market, with persistently tight employment conditions potentially keeping price pressures elevated for a longer period. Knightley notes that the core and supercore inflation readings are still too high for the Fed to consider signaling an impending interest-rate cut.

However, there are reasons for cautious optimism regarding disinflation trends. Although the annual headline CPI readings have consistently remained slightly above 3% since June, the ongoing decline in gasoline prices and the anticipated drop in rent prices indicate that the headline CPI may dip below 3% by the second quarter of this year, as predicted by Knightley.

Barring any unforeseen developments, it seems unlikely that the Fed will implement rate cuts until at least the June Federal Open Market Committee meeting.

The release of the Consumer Price Index report is scheduled for 8:30 a.m. ET on Thursday, Jan. 11.