Image source: Statistique Canada
CPI: After a tough 2022 caused by inflation and rising prices, the consumer rate is projected to have decreased in December versus November.
The drastic drop in energy and gasoline prices triggered the decrease.
The annual rate would remain extremely high.
According to Dow Jones, analysts predict a monthly reduction in the consumer price index of 0.1%.
Inflation is expected to climb by 6.5%.
Amid all the news, the CPI managed to stay below the 9.1% all-time high from June last year.
CPI vs Core CPI
The consumer price index monitors the average yearly change in consumer goods and service prices.
Food and energy costs are excluded from the core CPI because they shift more frequently than the prices of other goods.
This limitation is critical because it takes some time to identify the underlying market price when food and energy costs change dramatically from month to month or year to year.
The core CPI is regarded as a more reliable inflation gauge since it is less affected by short-term fluctuations in food and energy prices.
It is predicted to rise by 0.3% in December, representing a growth rate of 5.7% on a yearly basis.
In November, the core CPI grew by 0.2% per month and 6.0% year over year.
Diane Swonk, the head economist at KPMG, hailed the predicted dip.
“We welcome it with open arms. It’s good news,” said Swonk.
“It’s great and it helped to fuel consumer spending in the fourth quarter. But it’s still not enough.”
Slowed inflation outlook
The CPI will be issued Thursday, the penultimate set of data, before the Federal Reserve determines interest rates on February 1.
The inflation rate has recently become more critical in the financial markets.
According to traders, analysts’ expectations for the CPI are likely to reflect the slowing inflation.
They highlighted additional data indicators that suggested lower inflation expectations, such as the less-than-expected pay growth in the December jobs report.
Peter Boockvar, the chief investment officer of Bleakley Financial Group, was concerned as stocks rallied before the data were made public on Wednesday.
“The market is looking at it as glass half full. Inflation is rolling over, and the Fed is almost done raising interest rates,” he said.
“I think they remember the last two months when you had numbers that were well below expectations. They’re just assuming that’s going to be the case again.”
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The Fed impact
The central bank will likely increase the interest rate at its next meeting by a quarter point, according to traders in the futures market.
Economists predict policymakers will increase the fed funds target rate by 0.5 percentage points.
20% of the market expects a 50 basis point increase.
Simona Mocuta, head economist at State Street Global Advisors, noticed a stir over a data point.
“It’s amazing how much reaction and over a single data point,” she mused. “Clearly, the CPI is very important.”
“In this particular case, it does have fairly direct implications, which are about the size of the next Fed rate hike.”
A lower CPI, according to Mocuta, may significantly affect the Fed.
“The market has not priced the full 50. I think the market is right in this case,” she explained.
“The Fed can still contradict the market, but what the market is pricing is the right decision.”
The decrease in energy prices and the 12% drop in gasoline prices in December, according to Luke Tilley, chief economist at Wilmington Trust, helped lower inflation.
Even though the rental market predicts a decline, the CPI hasn’t reflected it.
“Shelter is the main focus because of the lag,” said Tilley. “Everyone is familiar with the lag that it takes for the data to show up in the CPI.”
“We think there could be a sharper slowdown.”
Housing prices make up over 40% of the core CPI and are expected to climb by 0.6% month over month.
According to Luke Tilley, landlords have expressed frustration about their inability to raise the rent as the housing market continues to slide.
“We’re pencilling in slower increases in January and February and March on that shorter leg.”
Focus on services
Since goods inflation is expected to continue declining due to the stabilizing supply chain, economists have focused on the CPI’s growing service inflation.
“The headline monthly changes over the last two, three months overstate the improvement,” said Simona Mocuta.
“We’re going to get the same help from gasoline in the next report. I don’t want to see an acceleration in shelter. I want to see some of the discretionary areas show deceleration.”
“I think right now the focus is very much on the services side.”
The market is currently focusing on the Fed’s ability to control inflation as it could influence how much more interest rates are raised.
The economic slowdown brought on by the rise can be the difference between a recession and a soft landing.
“The hope is that basically, we are now in a position where you could envision a soft landing,” said Diane Swonk.
“That requires the Fed to not only stop raising rates but ease up sooner, and that doesn’t seem to be where they’re at.”
“The Fed is hedging a different bet than the markets are. This is where nuance is really hard. You’re in this position where you’re improving,” she continued.
“It’s like a patient is getting better, but they’re not out of the hospital yet.”
Inflation is expected to have declined in December, but it may not be enough to stop the Fed