Inflation remains sticky, rate cuts bet could cool off.

The journey towards softening inflation took a snag as the pace of price level gains achieved momentum in December compared to the prior month. 

This is a setback to traders who are pricing in aggressive rate cuts for 2024, starting in March. On a yearly basis, the CPI had jumped 3.4%, above the consensus estimate of 3.2%. On a monthly basis, the headline level rose 0.3%, which aligns with estimates. 

💸Sticky inflation remains a hurdle.💸

The main culprit, which we have mentioned numerous times, without surprise, is the shelter cost. It rose by 0.5% in December and is responsible for more than half of the monthly increase in inflation. It has proven to be highly stubborn, although many economists are projecting that figure to cool down in the coming months, hopefully helping to reach the Fed’s 2% target. 

💡Positive signs on the data.💡

Still, there are some glimmers in the data. If we are to exclude the more volatile components, such as the food and energy component, we are seeing a general decline in price pressure. Core CPI had cooled off to 3.9% growth on a yearly basis, which is a further drop from December 4%. Core CPI rose 0.3%, which was steady in November. 

The CPI data points to nothing worrying for the Fed to step onto the pedal for a rate hike again while strengthening the probability of a soft landing. 

🥁What are some drivers of inflation?🥁

Zooming into the fine details, motor vehicle insurance, used car and truck prices, and the gasoline index had climbed in December, which helped to keep inflation above expectation. 

🎲What are the cool points? 🎲

A welcome note is that food costs are increasing, and grocery costs remain steady. For example, the cost of food at home had only risen by 1.3% every year, and dining in restaurant costs had seen a slower growth of 0.3% in December compared to 0/4% in November. 

Household furnishings saw a decline of 0.4% in December, which is in line with the fall seen in other categories such as appliances and durable goods. 

📪What’s on the menu today? 🖨

At 9.30 pm, we will receive another side of inflation data: the PPI data. It is also expected to climb; thus, it could prove challenging for the market to break new highs. 

On a positive note, at 11 pm, we have FOMC member Kashkari speaking. He is among the most dovish members of the Fed, and if he maintains that, some relief in the market could be a factor in. 

It is January 12, Friday, at 9 am in Singapore and 9 pm in New York. It has been a wild trading ride, and we hope all friends have a safe trading day to wrap up the week.