Inflation is expected to have declined in December

A woman shops in a supermarket as rising inflation affects consumer prices in Los Angeles, California, June 13, 2022.

Lucy Nicholson | Reuters

The pace of consumer inflation is expected to slow slightly in December from the previous month as fuel and energy prices plummet, but annual rates are likely to remain uncomfortably high.

According to Dow Jones, economists now expect the consumer price index to fall 0.1% on a monthly basis, but inflation is still projected to increase at a 6.5% year-over-year pace. . That compares with up 0.1% in November, and 7.1% annual rate. However, CPI is still good the highest rate of 9.1% in June.

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Core CPI, which excludes energy and food, is expected to grow 0.3% in December, up 5.7% year-on-year. Core CPI rose 0.2% in November and 6% on a year-over-year basis.

“We welcome it with open arms. That’s good news,” said KPMG chief economist Diane Swonk. “It was great, and it helped boost consumer spending in the fourth quarter. …But it’s still not enough.”

The consumer price index is scheduled for Thursday at 8:30 a.m. ET. This is the final CPI report ahead of the Federal Reserve’s February 1 interest rate decision. For that reason, the inflation figure has become a major event for financial markets and some traders are now betting that it will show inflation even slower than forecasted by other traders. economist. They also point to weaker-than-expected wage growth in December employment reportas well as other data reflecting lower inflation expectations.

Stocks rallied on Wednesday ahead of the report. “The market is looking at it like half a glass. Inflation is picking up and the Fed is almost done raising rates,” said Peter Boockvar, chief investment officer at Bleakley Financial Group. “I think they remember two months ago when you had numbers that were much lower than expected. They just assumed it was going to happen again.”

Expected impact on the Fed

In the futures markets, traders continue to bet that the central bank will raise interest rates by just a quarter at its next meeting. Meanwhile, some economists continue to expect policymakers to raise the federal funds rate target by 0.5 percentage points. Market expectations are only 20% for a 50 basis point gain. One basis point is equal to 0.01 of a percentage point.

“It’s amazing how much overreaction and overreaction to a single data point,” said Simona Mocuta, chief economist at State Street Global Advisors. “Clearly the CPI is important. In this particular case, it has a fairly direct policy impact, comparable to the size of the next Fed rate hike.”

Mocuta said a lower CPI would hurt the Fed. “The market hasn’t fully valued $50. I think the market is right in this case,” she said. “The Fed may still be at odds with the market, but what the market is pricing in is the right decision.”

Wilmington Trust chief economist Luke Tilley said a 12 percent drop in gasoline prices in December and other declines in energy prices — for costs like heating homes — have helped keep inflation down.

“Shelter is the main focus because of the latency,” he said. Rental market data suggests a slowdown, but the CPI has yet to reflect that. “Everybody is familiar with the latency required for data to show up in the CPI,” adds Tilley. “We think there might be a sharper slowdown.” The cost of shelter accounts for 40% of the base CPI.

The shelter is expected to grow 0.6 percent month-on-month. Tilley said with the downturn in the real estate market, he’s heard from landlords that they’re having a harder time raising rents. “We are calculating slower increases in January, February and March with that shorter lag,” he said.

Focus on inflation in services

Economists are closely watching to see how much services-related inflation rises in the CPI, as commodity inflation is expected to continue to decline as supply chains are operating more normally.

“The monthly headline changes over the past two, three months have exaggerated the improvement. We won’t get the same help from gasoline in the next report. I don’t want to see an acceleration here. shelter. I’d like to see some of the arbitrary areas showing deceleration,” said State Street’s Mocuta. “I think right now the focus is a lot on the service side.”

Markets are focused on inflation as the Fed’s progress in combating inflation could determine how far the central bank will go on its rate hike path. Rate hikes are slowing the economy, and how much more it chooses to do so could be the difference between a soft landing or a recession.

“The hope is that we’re basically now in a position where you can imagine a soft landing. That would require the Fed not only to stop raising rates, but to ease earlier, and that seems likely. not their goal,” he said. Shocked. “The Fed is hedging a different bet than the market. … This is where the nuances get really tough. You’re in this position where you’re improving. It’s like a patient being treated. recovered, but they’re not out of the hospital yet.”

Federal funds interest rate range is now at 4.25% to 4.5% and central bank has forecast the last high rate is 5.1% for this year.

“The Fed is also worried about a second wave of supply shocks, whether it’s China abruptly abandoning its no-Covid policy or something else from Russia. They don’t want to declare victory too soon,” Swonk said. “They’re doing it very clearly. They’ve said it over and over and no one is listening.”

Economists expect another key metric – the personal consumption spending deflation index – could show core inflation slowing even below the Fed’s forecast of 3.5% on March 31. December. Some economists predicting a recession are predicting a rate cut before the end of the year, as the market expected. But The Fed has no forecast of a rate cut until 2024.

Some strategists expect Fed officials to begin to appear more dovish and less at odds with market views. Boston Fed President Susan Collins said in an interview with The New York Times on Wednesday that she is leaning toward a quarter point raise at the next meeting.

“We think one of the changes in the coming months is that the Fed will soon realize that it is cheaper to change the inflation narrative than to reverse the recession that has resulted in millions of job losses,” said Fundstrat founder. Tom Lee wrote in a note Wednesday.


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