Summary:

In December 2024, the United States witnessed a Consumer Price Index (CPI) increase of 2.9% year-on-year and 0.4% month-on-month, indicating a slight rebound in inflation that was marginally above expectationsThe Producer Price Index (PPI), which serves as a precursor to CPI changes, rose by 0.2% month-on-month and 3.3% year-on-year, lower than the market's predictionsHow we interpret these shifts in prices has significant implications for the Federal Reserve's interest rate policiesThe Fed's decision to pause any further rate cuts in the short term is likely to remain unchangedHowever, the long-term trajectory will be contingent upon the economic policies implemented by the newly elected president and their subsequent impact on inflation.

1. CPI Overview for December: Inflation Slightly Surges.

On January 15, the Bureau of Labor Statistics (BLS) released the inflation data for the final month of 2024. The CPI in December reflected a year-on-year increase of 2.9%, a 0.2 percentage point rise from November's figures, slightly exceeding market expectations of 2.8%. Month-on-month, the CPI rose by 0.4%, up from November's 0.3%, also a tad above predicted figures.

Excluding the more volatile categories of food and energy, the Core CPI showed a 0.2% month-on-month increase for December, a minor decline from the previous four months, which had all recorded a steady 0.3% increase, falling short of the anticipated 0.3%. Year-on-year, the Core CPI came in at 3.2% for December, down from November's 3.3%, and also slightly lower than expectations.

A significant portion of the increase in CPI is attributed to a 2.6% rise in energy prices, with gasoline prices skyrocketing by 4.4%. According to the BLS, these factors contributed to around 40% of the index's increase

Food prices also experienced a rise, with a 0.3% month-on-month increase recorded in December.

In comparison to the previous year, the CPI for food increased by 2.5% in December 2024, while energy prices edged down slightly by 0.5%.

Prices for used cars and trucks saw a month-on-month increase of 1.2%, while new vehicle prices rose by 0.5%. Transportation services recorded a spike of 0.5%, reflecting a year-on-year increase of 7.3%. Moreover, egg prices surged by 3.2% month-on-month, showing a staggering 36.8% rise compared to the same month last yearCar insurance also increased by 0.4%, marking an 11.3% yearly rise.

Housing prices, which represent about one-third of CPI’s weight, rose by 0.3% month-on-month and recorded a 4.6% increase year-on-year, marking the smallest monthly increase since January 2022.

2. PPI Analysis for December: A Modest Increase Below Expectations.

The Producer Price Index (PPI), also recognized as the wholesale price index, serves as a crucial indicator for CPI expectations, functioning upstream of CPI and influencing the latter through commodity flow dynamics.

According to data released by the BLS on Tuesday, the PPI for December witnessed a mere 0.2% month-on-month increase, falling short of November's increase of 0.4% and the predicted consensus of 0.4% from Dow Jones

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The Core PPI, which excludes food and energy prices, aligned with expectations by showing no change month-on-month.

In year-on-year terms, the PPI rose by 3.3%, maintaining the same growth rate as in NovemberThe Core PPI, excluding food and energy, recorded a year-on-year rise of 3.3%, slightly lower than November's 3.5%.

Segmented by categories, PPI's December performance reflected a significant boost in commodity prices, largely driven by a 9.7% month-on-month rise in gasoline pricesDespite increases for some food and energy-related indicators, the prices of fresh and dried vegetables plunged by 14.7%, thereby offsetting those gains.

On the service side of PPI, while passenger prices surged by 7.2%, overall service PPI remained flat due to a decrease in hotel accommodation rates.

3. Assessing U.S

Price Trends: Implications for Federal Reserve Interest Rate Decisions.

The CPI data released on Wednesday indicates that inflation in the U.Sremains elevated, encountering hurdles along the path to reach the Federal Reserve's 2% targetThis aligns with the Fed's predictions regarding a gradual decrease in interest rates throughout the year.

Conversely, the PPI released on Tuesday, exhibiting a below-expectation increase, hints that even though December's CPI performance exceeded expectations, the trends do not point to an uncontrollable surge in retail prices, suggesting a potential easing of inflationary pressures in January 2025. However, the fluctuations in retail pricing are influenced not only by upstream PPI shifts but also by wage variances, import prices, and tariffs

Hence, the signals of easing inflation may not suffice to prompt immediate rate cuts from the Fed in the short term, though they could increase the odds of future cuts.

Continuing to steer inflation back towards the Federal Reserve's 2% target remains problematic and fraught with uncertainties, such as:

First, robust wage growth spurred by a resilient labor market that surpasses expectations.

The non-farm payroll report issued by the BLS last Friday reported that job growth in December significantly exceeded expectations, with an increase of 256,000 jobs compared to November's 212,000, and outpacing the Dow Jones forecast of 155,000. The unemployment rate ticked down from 4.2% in November to 4.1% in December, revealing a factor that is tentatively lower than anticipated.

Concerns linger among Federal Reserve officials regarding labor prices as a key inflationary source

The average hourly wage in December saw a month-on-month growth of 0.3%, slightly above expectations, with the year-on-year increase holding steady at 3.9%.

Second, the impact of economic policies on inflation.

The tariffs promised by the newly elected president will undoubtedly push prices upward, while an extensive deportation of illegal immigrants may diminish labor supply, worsening labor market imbalances, and consequently driving labor prices higherThis dynamic could escalate into a wage-price spiral, thereby amplifying public concerns over inflation and potentially leading the Fed to exercise caution in cutting rates throughout 2025.

4. The Fed’s Short-Term Decision to Pause Rate Cuts Likely Unchanged.

Owing to the easing progress on price pressures, the inflation rate is currently grappling with the challenge of its “final mile.” This scenario suggests that the Federal Reserve will likely maintain current policy rates during its upcoming policy meeting later this month.

Data from the Chicago Mercantile Exchange indicate almost certainty that the Fed will remain stationary in its decisions at its January 28-29 meeting, with only a 2.7% chance for a rate cut by the end of January, reflecting no substantial changes post-CPI announcement.

Expectations surrounding potential rate cuts at the March 19 Fed meeting have increased slightly to 27.3%, yet 72% of participants remain convinced there will be no hikes at that meeting.

Under the current conditions, the Federal Reserve may enact 2 to 3 rate cuts in 2025, potentially beginning as early as May.

The reason for the keen interest in the Fed’s anticipated rate cuts is their direct influence on China’s monetary policy outlook