Inflation expected to have ticked up slightly in December

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The latest reading on inflation is set for release Thursday at 8:30 a.m. ET as investors search for clues about when the Federal Reserve will start bringing down interest rates.

The December Consumer Price Index is expected to show a slight increase in annual headline inflation to 3.2%, up from the 3.1% increase seen the month prior. But when removing the volatile food and energy categories, economists expect that “core” inflation fell to an annual rate of 3.8% from 4.0% the month prior.

The print will be critical for investors who have been increasingly pricing in the odds of a soft landing — where inflation retreats to 2% without an economic downturn — since the last CPI report. Such an outcome could mean the central bank’s interest rate hiking campaign is over and that it could start cutting rates, bringing down the cost of borrowing for businesses and consumers.

Read more: What the Fed rate-hike pause means for bank accounts, CDs, loans, and credit cards

Economists at Bank of America expect readings of headline and core inflation slightly higher than the consensus. But even “core” CPI at 3.9% in December could keep the door open for a Fed rate cut in March, per the BofA economics team.

“A CPI report in line with our forecast would continue to signal ongoing progress towards the Fed’s 2-percent target,” US economist Stephen Juneau wrote in a note to clients. “Therefore, in our view, it would keep the Fed on track for 100bp of cuts this year beginning with a 25bp cut in March and continuing at a quarterly cadence thereafter.”

As of Wednesday afternoon, markets priced in a roughly 67% chance the Fed cuts interest rates in March, per the CME FedWatch Tool.

On a monthly basis, economists see prices increasing 0.2% in December, a move up from the 0.1% seen the previous month. Meanwhile, economists project that core inflation increased 0.3% month over month, unchanged from November.

Under the hood, economists at Goldman Sachs highlighted three key areas to watch in Thursday’s report: car prices, airfares, and shelter. Goldman sees car prices and shelter continuing their path lower while airfares could be an upside risk in the December report.

Goldman has seen “a meaningful increase” in its airline team’s real-time price measures. This could lead to a 5% increase in December airfare prices and a 3 basis point contribution to “core” CPI, per Goldman.

“Going forward, we see further disinflation in the pipeline in 2024 from rebalancing in the auto, housing rental, and labor markets, though we expect a small offset from a delayed acceleration in healthcare,” Goldman economists Manuel Abecasis and Spencer Hill wrote in a research note.

“We forecast year-over-year core CPI inflation of 2.9% and core [Personal Consumer Expenditures] inflation of 2.2% in December 2024.”

A customer visits a supermarket in San Mateo, California, the United States, Dec. 12, 2023. (Photo by Li Jianguo/Xinhua via Getty Images) (Xinhua News Agency via Getty Images)

While markets have been aggressive in pricing in interest rate cuts as the path forward for inflation appears lower, Fed officials have been more measured.

Fed Governor Michelle Bowman said on Monday that while the Fed may eventually need to cut rates if inflation falls further, “we are not yet at that point.”

In separate remarks on Monday, Atlanta Fed president Raphael Bostic echoed a similar sentiment.

“We are in a restrictive stance, and I’m comfortable with that, and I just want to see the economy continue to evolve with us in that stance and hopefully see inflation continue to get to our 2% level,” he said, according to media reports of his comments.

Given the Fed’s tentative comments and the aggressive rally seen in stocks since the last inflation report, Wall Street strategists have tempered expectations for stock reaction following the report.

“[December’s] CPI numbers have a bit of an asymmetric risk,” Interactive Broker’s Chief Strategist Steve Sosnick told Yahoo Finance Live. “I think a good number, a better than expected number, is already priced in. … I don’t think that an upside surprise to inflation is priced in right now.”

Josh Schafer is a reporter for Yahoo Finance.

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