Mixed inflation data for December.
The overall Consumer Price Index (CPI) increased by 0.4 percent for December, slightly above market expectations of 0.3 percent. This pushed the 12-month trend rate up to 2.9 percent (from 2.7 percent in November), equal to market expectations. But the core CPI (excluding the volatile food and energy components) rose by only 0.2 percent for the month, less than market expectations of 0.3 percent. As a result of the smaller monthly gain, the 12-month trend rate slipped to 3.2 percent, below market expectations of 3.3 percent (which would be unchanged from November).
A jump in energy prices was primarily responsible for the increase in the overall CPI, especially energy commodities (fuel oil and motor fuels). Shelter prices rose by 0.3 percent for a second consecutive month in December, despite market indicators of a continuing decline in rents. There was an outsized increase in transportation services, especially motor vehicle insurance (up by 0.4 percent for the month and 11.3 percent for all of 2024) and airline fares (up by 3.9 percent for the month and 7.9 percent for the year).
Energy prices are not controllable by the Fed (neither are food prices), and so the Fed prefers to look at core inflation – which is significantly affected by monetary policy trends. The Fed’s preferred inflation measure is the core price index for personal consumption expenditures (PCE), which will be released later this month for December. But knowing the core PPI and CPI figures for the month suggests that the monthly gain in the core PCE price index will slow as well.
Does this mean that Fed easing is back on the menu, after markets mostly removed it after last week’s strong employment report? Because of volatility in survey figures, the Fed will almost certainly not make policy changes in the basis of a single month’s data (including the most recent employment report). That certainly makes the odds of an easing at the next FOMC meeting extremely low. But if the jobs numbers cool in coming months and core inflation continues to trend slowly lower, then the odds of Fed easing later this year would certainly rise (as shown by the CME Group’s FedWatch Tool). And if that cooling in both job growth and inflation continues, then more than one easing could occur. With solid job data, the Fed is likely to concentrate more on the inflation figures for policy changes. But if the job figures weaken more significantly, the Fed would respond more strongly to that. We expect some slowing in job growth over the course of this year, but even by year end it is likely that nonfarm payrolls will still be increasing by around 100,000 per month – far from a recession scenario. Moreover, core inflation should also continue to slip – allowing some Fed easing in 2025.
The wild card in all of this are the impacts of the incoming Trump administration’s trade (i.e., tariff), immigration, tax, and regulatory policies. At this point, we don’t really know what will be proposed, let alone what the impacts will be. On average will they boost growth (and the job market) or not. Will they boost inflation or not? Policies that boost growth and (especially) inflation would result in less Fed easing, while policies that slow growth and lower inflation would result in more Fed easing. We will know more about these policies in coming months.
David W. Berson, Ph.D.
Chief US Economist
Email | Bio
Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.
Sign up for our FREE Cumberland Market Commentaries
Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.
