US CPI and the battle against inflation is not over yet

In December, the US Consumer Price Index rose 3.4% year-on-year, beating market expectations of 3.2%. What are its implications for monetary policy?

the US inflation in December It was stronger than the expected consensus. The consumer price index rose by 3.4% year-on-year. Above market expectations 3.2% (November: 3.1%). On a monthly basis, the CPI recorded a variance of +0.3% (compared to expectations of +0.2%).

The core index (i.e. excluding energy and food) rose 3.9% (market expectation: 3.8%; November: +4%). On a monthly basis, the increase in core prices was 0.3%, in line with expectations (November +0.3% m/m). SubsequentlyThe yield on 10-year Treasury bonds exceeded 4% again The dollar index rose. However, Fed funds futures continue to decline Between five and six interest rate cuts this yearThat's double what the Federal Open Market Committee forecasts.

It will take some time for the price to drop

Commenting on the potential impact of the Fed data, Mark Sherlock, head of US equities at the Fed, said: “US inflation was higher than expected in December as… The services component continued to exert upward pressure. “Shelter goods remain high and are rising for the second month in a row.”

This, he admits, is Disappointing for investors who expected six interest rate cuts during 2024 He suggests that The market may have exaggerated the arguments it made to declare the end of the battle against inflation. The Fed has always claimed to be data-driven, saying it wants to avoid the mistakes of the 1970s (when interest rates were cut too soon and the US economy suffered a second, more painful inflationary cycle). “Today's data will not force them to cut interest rates quicklySherlock says.

Richard Flax, chief investment officer at Moneyfarm, agrees: “The rise in overall inflation should be Cooling expectations about an imminent interest rate cut By the Federal Reserve, the central bank will first have to return inflation to its 2% target range before it can ease monetary tightening.

The soft landing is still in place

Mark Haefele, chief investment officer at UBS Global Wealth Management, addresses the reality of this Core CPIWhich fell to 3.9% from 4% in November Lowest level since May 2021. “Commodity inflation remained unchanged from the previous month, while basic services, especially housing costs, contributed more to the core CPI,” the expert says. He goes cluesHowever, that Inflation continues to calm, in line with the soft fundamental bearish case, although six markets, which are pricing the first rate cut in March with a probability approaching 70%, may be taking an overly optimistic view. “Policy is expected to be eased significantly in 2024 and markets remain optimistic about it Timing of the Fed's first interest rate cut“, he explains.

Morgan Dilldon, head of investment strategy for Europe at GlobalX, also puts core inflation at the center of her analysis. “Generally, Inflation numbers are mixedIt indicates a slowdown in the headline number and a rise in the headline number, leaving the status quo intact. The Fed and markets may continue to be conflicted about interest rate expectations Throughout the first quarter of the year, they both need to see their opinions confirmed by data. At the same time, the prospect of lower interest rates and a weaker US dollar lays the foundation for a fresh start Global soft landing in 2024This leaves US stocks with greater upside potential than their European counterparts.