In the context of rising energy and food prices, the Consumer Price Index (CPI) in the United States has shown further acceleration last month, which may justify the Federal Reserve's cautious approach towards any future monetary easingHowever, after a period of stability spanning four months, the core inflation that tends to be more representative unexpectedly dropped, offering a sigh of relief to the markets that are concerned about reversing price trendsAdjustments in the interest rate market suggest a shift in sentiment, with the probability of two rate cuts within this year climbing back above 50%. The final decision, however, may hinge on the actual implementation of U.Spolicies.

Overall, a noticeable easing of service-related inflationary pressures was observedThe U.SDepartment of Labor revealed that year-over-year CPI for December stood at 2.9%, an increase of 0.2 percentage points from last month's value, marking the largest rise in five months

On a monthly basis, the CPI rose by 0.4%, quickening by 0.1 percentage points compared to NovemberWhen excluding the volatile food and energy sectors, the core CPI year-over-year increase recorded was 3.2%, slightly lower than the previous month and better than the anticipated figure of 3.3%. Month-over-month, it increased by 0.2%, slightly below the predicted 0.3%.

The primary driver behind the overall CPI increase was attributed to energy prices, which accounted for nearly 40% of the total riseConcurrently, grocery prices surged by 0.3% on a monthly basis, spurred by rising costs associated with grains, baked goods, meats, poultry, and fishA significant spike was seen in egg prices, which soared by 3.2% monthly due to supply shortages arising from an outbreak of avian influenza.

After experiencing a notable slowdown in the previous month, rental costs, which bear significant weight within the CPI calculations, saw a slight rebound with a month-on-month growth of 0.3%. However, the year-on-year growth rate dropped to 4.6%, the lowest since January 2022, serving as a vital factor in suppressing core CPI growth

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In other segments, hotel prices dipped by 0.1%, contributing to a decrease in overall service sector costsAirfare prices spiked by 3.9%, while used car prices increased by 1.2% alongside a 0.4% rise in auto insurance, amidst a continual rise in the costs of healthcare services, which increased by 0.1%.

Regarding the upcoming inflation report for December 2024, John CWilliams, President of the Federal Reserve Bank of New York, expressed confidence in the ongoing process of combating inflationHe stated, "Looking ahead, I expect that inflation will gradually decline over the next few years, approaching our 2% targetDespite a general increase in economic demand, the economy’s capacity to produce goods and services, supported by labor force expansion and productivity improvements, is growing fasterThis suggests that above-trend economic growth can continue without necessarily pushing up prices."

The latest CPI figures resonate similarly with the Producer Price Index (PPI) released recently

Influenced by base effects, the year-over-year PPI in December exhibited a growth of 3.3%, yet the month-on-month increase fell to 0.2%. The rising costs of goods were mitigated by relatively stable service prices, indicating an ongoing downward trend in inflation.

Boris Schlossberg, a macro strategist at BK Asset Management, remarked in an interview that examining the past year reveals a gradual decline in U.Sinflation rates following a series of interest rate increases totaling 525 basis points, showcasing the effects of a restrictive monetary policyYet, he stressed that significant work remains for the Federal Reserve to achieve its 2% inflation target, labeling the 'last mile' as a daunting task"While the CPI data offers some relief to the public, service sector inflation remains trickyConsumer-spending-driven total demand continues to bolster economic growth, making it challenging for the Fed to further lower interest rates in the short term," he analyzed.

In the wake of the CPI data release, institutions predict that the core Personal Consumption Expenditures (PCE) index, which is closely watched by the Federal Reserve, will experience a month-on-month increase of 0.2%, maintaining an annual growth rate at 2.8% for the third consecutive month.

As we look towards the implications of U.S

policies, the data from December 2024 could mark a significant turning pointSpeculation around tax cuts resulting in a more resilient economy, extensive tariffs on imported goods, and large-scale deportation of illegal immigrants all pose potential variables that could drive up prices.

A recent consumer survey conducted by the University of Michigan indicates that American households are concerned about how tariffs might inflate product costsThe one-year inflation expectations accelerated by 0.5 percentage points to 3.3%, marking the highest level since May 2024, while the five-year inflation forecast rose from 3% to 3.3%. Coincidentally, a survey from the Federal Reserve Bank of New York also reflected that respondents have a bleak outlook regarding inflation in the next three years.

Senior economist Guatieri at the Bank of Montreal Capital Markets noted, "Given the policy propositions in the United States and its economic resilience, the Federal Reserve has more work to do to fight inflation

This is why the Federal Open Market Committee signaled towards the end of last year to lower the federal funds rate at a more gradual pace."

After the CPI data release, futures markets for the federal funds rate indicated an anticipation for rate cuts to occur as early as JuneSimultaneously, the probability of two rate cuts being executed within this year has rebounded from below 40% at the beginning of the week to surpass 50%.

As per Guatieri's observation, "The Federal Reserve is likely to hold steady in January; I believe it won’t resume rate cuts until the effects of tariffs as a mechanism for inflation transmission are clearly visible.”

With all recent data showing inconsistencies, Wall Street appears somewhat perplexed regarding the Federal Reserve's next course of action, with economists expressing divergent viewsFor instance, both JPMorgan and Goldman Sachs revised their rate cut expectations down from three cuts to two, while Nomura and Barclays anticipate only one cut