The December US CPI report painted a mixed picture of price pressures in the US economy as 2024 drew to a close.
At a headline level, prices rose 2.9% YoY, in line with expectations, and the fastest such rate since July.
However, excluding food and energy, the core index rose a cooler-than-expected 3.2% YoY, the slowest pace since last August, and a sign of underlying inflationary pressures fading somewhat.
Taking a step back, the CPI figures don’t add particularly much to the broader discourse, instead, serving to re-affirm that underlying price pressures remain relatively stubborn, and that the path back towards the 2% inflation target will be a relatively turbulent one.
Consequently, the FOMC remain on course to ‘skip’ the January meeting, particularly in light of the resilient nature of the labour market, and amid increased upside inflation risks stemming from the likely trade policies of President-elect Trump’s Administration.
The key question now is whether the FOMC’s ‘skip’ turns into a more prolonged ‘pause’. While further rate cuts, back towards neutral, remain likely this year, albeit at a much slower, and more cautious pace than seen in 2024. More data along the lines of what has been received in early-2025 will only serve to heighten expectations that Powell & Co. will remain on the sidelines for the time being, at least for the first quarter of 2025.
Taking this into account, risks around the policy outlook this year are considerably more two-sided than those seen last year, with a renewed hawkish risk re-introduced to the policy path. Consequently, the comfort blanket of a ‘fed put’ which has been ever-present for risk assets over the last 18 months or so is no longer present, and fades further each month that incoming data remains solid.
While this solid data, and subsequent solid earnings growth, should see the path of least resistance for equities continuing to lead to the upside, said path will likely be bumpier and more volatile than participants have become familiar with. Conviction, too, will likely be lacking for the time being, particularly with the key risks of Q4 earnings season, and President-elect Trump’s looming inauguration, on the horizon.
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