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Macro Developments Since Nov FOMC: Inflation

US
  • Falling between the labour reports and offering a relatively more dovish tilt was a significant miss for CPI inflation, compounded recently with an additional miss for core PCE inflation before a partial offset from stronger PPI inflation for November.
  • Core CPI inflation slowed from 0.58% to 0.27% M/M. Contributions came from goods and services alike, the latter importantly from slightly larger than expected cooling in rents but also an idiosyncratic factor in health insurance. It saw markets view a 50bp hike on Dec 14 as locked in (from 57bps priced beforehand) and the terminal rate slid 15bps to 4.9%.
  • It was however obviously just one release and FOMC members have both in the past and since warned about wanting to see multiple months of slowing sequential inflation, helping at the time push the terminal rate back above 5% in the following week.
  • More recently, the CPI rise ended up translating to a 0.22% M/M increase in core PCE (consensus 0.3), getting closer to a monthly rate consistent with the Fed’s 2% target but keeping July as the only month since Feb-2021 to have achieved that.
  • Going against this moderation in October has been today's bounce in PPI inflation, on its own suggesting more resilience in goods inflation than perhaps first expected was the case in November. However, service inflation remains key, due to both its weight and stickiness, and for that we must wait for US CPI on Dec 13, day one of the two day FOMC meeting. .

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