PREVIEW - US CPI (13:30GMT/08:30EST): Annual inflation seen ticking up slightly, but the rate of annual core inflation is seen continuing its fall

EXPECTATIONS: US headline CPI is expected to rise +0.2% M/M in December (prev. +0.1%), and the annual measure is seen ticking up to 3.2% Y/Y from 3.1% prior. The core rate of CPI is seen rising +0.3% M/M (matching the rate seen in November), while the annual core rate of inflation is seen slipping to 3.8% Y/Y (prev. 4.0%).
DRIVERS: November's report saw headline inflation continuing to fall, though analysts at JPM noted that core inflation remains sticky at a level higher than what the Federal Reserve wants, as elevated wages in the services sector continue to add an element of stickiness; after that November data, JPM said that it appeared less likely that the Fed will implement a rate cut in the upcoming March 2024 meeting. Meanwhile, last month's +0.3% M/M rise in core inflation was driven by a rebound in used vehicle prices, but recent auction data suggest that will be more than reversed in December, Capital Economics says. The economic consultancy says a fall in used vehicle prices should push annual core CPI back below 4% for the first time since early 2021. Elsewhere, it notes that after sharp falls in previous months, gasoline prices were little changed, and the decline in natgas means that energy prices may nevertheless have fallen further.
POTENTIAL FALSE SIGNALS: There are numerous reports flagging up the potential that the recent decline in inflation may be a false signal; the latest edition of The Economist, for instance, says that while goods prices have declined, services prices continue to edge up, with many rising more quickly than the pre-pandemic trend, while even house prices saw a rebounded in 2023 (as mortgage rates now fall back, it leaves risks that house prices could pick-up further), while an easing in financial conditions as the Fed cuts rates would also feed into renewed price pressures. "If inflation rebounds the Fed would have little choice but to keep interest rates elevated, perhaps reviving the fears of a recession that have all but vanished," The Economist said.
FED POLICY: Traders will be looking to see if there is any resurgence in price pressures that could knock the market's dovish view of the Fed's rate trajectory. Currently, the market is pricing almost six 25bps rate cuts this year vs the FOMC's December projections, which have pencilled in just three. This week, the influential FOMC Vice President John Williams said that it was still too soon to call for rate cuts as the Fed still has some distance to go on getting inflation back to 2% target.