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Still Stubborn Service Inflation But Market Reluctant To Stray Too Far From March Cut

US
  • Core CPI came in slightly stronger than expected in December at 0.31% M/M (cons 0.3 but skewed lower).
  • There weren’t any particularly large drivers for the surprise compared to recent months, although used cars led with a further 0.5% increase despite continued wholesale price declines.
  • Heavily weighted rent measures showed no sign of further moderation and the supercore CPI was solid at 0.40% M/M (limited analyst estimates were closer to 0.35%) for minimal progress from the 0.44% in November.
  • Trend growth rates are clearly stubborn: core CPI increased 3.3% annualized over the past three months (a trend notably near unchanged for the past three months as well) and has registered 3.2% over the past six months, whilst supercore CPI has been running at 4.3% and 4.6% annualized over the past three and six months.
  • The report offers a worrying stalling in the moderation in CPI data although core PCE has been running lower than core CPI in recent months, and we suspect it should have continued to do so in December barring any PPI surprises tomorrow.
  • Initial sellside estimates suggest core PCE could still be growing roughly in line with the 2% inflation target on a six-month basis, although supercore PCE could have increased closer to 3%.
  • It’s this resilience in service inflation, along with today’s continued hawkish jobless claims data that helped trim market expectations of a Fed rate cut in March from circa 70% to 60%, although this move has since been reversed with EU rates-related moves.
  • The fading of volatility in the categories seen through Sep-Nov comes as inflation struggles in the “last mile” of its return all the way to target, and shouldn’t be particularly comforting for the Fed. With a relatively dovish FOMC member in Williams having already pushed back on March cut pricing after the December FOMC, we expect the hawks and possibly Chair Powell to lean into points ahead.
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