PREVIEW: US December CPI data will be released at 13:30GMT/08:30EST on Thursday January 12th

SUBSTANTIAL PROGRESS: There is a feeling that traders have fully discounted the ‘peak inflation’ narrative, and are now refocussing on the deteriorating growth dynamic – as evidenced by the market reactions to last week’s ISM reports (where headline and new orders for both services and manufacturing have tilted into contraction) and nonfarm payrolls data (that shows a trend of declining wage pressures). That said, the Fed has not yet seen the ‘substantial progress’ that it has been seeking. In December, Fed Chair Powell said that although the declines in prices pressures in October and November was welcome, core CPI was still running three times above target, and policymakers would still need to see substantially more evidence to give it confidence that inflation was on a sustained downward path.

INFLATION TRENDS: Headline consumer price inflation peaked at 9.1% in June, and since then, we have had five consecutive months of decline headline annual rates of inflation. Core inflation peaked at 6.6% in September, and has pared back for two consecutive months. In terms of the recent trends in wages, average hourly earnings were rising at a rate of 5.6% Y/Y in March 2022, and has been moving lower since, with the latest data suggesting wages were growing at a rate of 4.6% Y/Y. In terms of consumer inflation expectations, the University of Michigan’s survey of consumer confidence has a one-year inflation expectations component, and although this has been choppy in recent months, has backed off from the highs of around 5.4% seen in the middle of last year, to 4.6% in the latest report. Similarly, the New York Fed’s survey of consumer expectations has seen one-year ahead inflation expectations ease from 6.8% in June to a still elevated 5.0% in the December report. 

HEADLINE CPI EXPECTATIONS: The consensus expectation is for headline CPI growth to be unchanged on a month-on-month basis in December (vs a previous rise of +0.1% in November), although the annual measure is expected to ease to +6.5% Y/Y in December from +7.1% the prior month.

DRIVING HEADLINE CPI: Credit Suisse explains that goods prices continue to face headwinds as supply chains and demand conditions ease. Services inflation, however, will continue to be supported by shelter prices, which CS sees peaking in one-or-two quarters before falling into year-end. A decline in gasoline prices will offset the upside in food inflation, the bank believes.

CORE CPI EXPECTATIONS: The rate of core CPI growth is seen accelerating a touch in December, with the consensus looking for +0.3% M/M rise (vs +0.2% M/M in November), although the annual rate of core inflation is also expected to pare back to 5.7% Y/Y in December from 6.0% previously.

DRIVING CORE CPI: Capital Economics thinks there will be factors holding back core prices in December. It is slightly below consensus in looking for a +0.2% M/M rise in monthly core prices, helped by a further decline in core goods prices. It also says that used vehicle prices should have fallen further too, while core services prices will be weighed on by another big drop in CPI for health insurance, though its analysts say it is probably too soon for the well-documented moderation in newly signed rents to feed through into the CPI rent and owners’ equivalent rent components.


POLICY EXPECTATIONS: Going into the release of the December CPI data, money markets are pricing a 25bps rate rise at the February meeting with 75% certainty, and see rates peaking at between 4.75-5.00% in March, and remaining at that level until November, where there is pricing for the Fed to begin cutting rates. That is a more dovish course for rates than was implied by the Fed’s December Staff Economic Projections, where 17 of the 19 officials who provided forecast predict that rates will rise above 5.0%; the median forecasts expects rates to peak at 5.1% (which is a Federal Funds Rate target of between 5.00-5.25%), with some risks it could be even higher if inflation data does not show substantial progress. 

11 Jan 2023 - 15:07- Research Sheet- Source: Newsquawk

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