December CPI: Keeping rate cut hopes alive

Market response

January 15, 2025 | 2 min read

Seema Shah

Chief Global Strategist

Christian Floro, CFA, CMT

Market Strategist

The December CPI print delivered a much-needed downside surprise, relieving some of the market anxiety that the U.S. economy is at the beginning of a second inflation wave. Annual headline inflation picked up to 2.9%, but, more importantly, annual core CPI dipped to 3.2%, with the pace of monthly core inflation slowing for the first time since May last year. For the Fed, today’s print is certainly not enough to prompt a January cut. But, it does keep hopes alive that the Fed’s cutting cycle still has some room to run.

Report details

Monthly headline inflation rose 0.4% in December, as expected, bringing the annual rate to 2.9%—from 2.7% prior. Meanwhile, core inflation, which strips out food and energy, came in lower than expected, increasing 0.2% in the month, seeing the annual rate decelerate to 3.2%. The recent run-rate of monthly inflation pointed to some improvement, as the three-month annualized pace of core inflation declined to 3.3% after rising to a six-month high of 3.7% in November.
Food prices increased 0.3% in the month, with four of the six major grocery store food group indices notching an increase. Meanwhile, energy prices rose 2.6% as fuel prices posted a strong rebound. The increase in both food and energy prices contributed over half of the monthly rise in headline inflation.
Core inflation remained primarily driven by services prices, which rose 0.3%. Housing costs remain in focus, with mixed news underneath the hood, as lodging away from home declined by 1% despite owner’s equivalent rent firming up to 0.3%. Shelter inflation remains the primary challenge to the ongoing disinflationary process. Still, there has been some steady—albeit slow—progress, with the index posting the smallest 12-month increase since January 2022, slowing to 4.6%.
Meanwhile, airfares saw a large jump, rising 3.9%—up from 0.4% prior—though this is largely a seasonal phenomenon. Auto insurance also came in firm, rising 0.4%, as insurance premiums continue to catch up to the rise in insurance costs.
Price pressures for core goods abated, with prices increasing by 0.1%. Gains here were primarily a function of new and used vehicle prices, which rose 0.5% and 1.2% in the month, respectively, while prices for both apparel and medical care commodities were mostly flat, rising 0.1% and 0%, respectively. Looking ahead, while core goods were a source of deflation earlier in the year, there are risks that potential tariff hikes could push prices higher.
The Fed's preferred supercore inflation measure, which excludes shelter from core services and is primarily driven by wage costs, decelerated to 0.2% in the period, seeing the annual rate decline from 4.3% to 4.1%.

Policy outlook

Risk markets appear to be encouraged by the idyllic combination of today’s weaker-than-expected inflation print and last week’s stronger-than-expected payrolls report. Not only does it tentatively imply that the U.S. economy is still on very solid footing and earnings growth can continue unabated, but it also delivers some much-needed relief to the recent bond market sell-off.

Of course, one soft CPI print does not make a trend, and markets are likely to continue being whipsawed over the coming weeks as they await policy announcements from the incoming administration. However, if today’s print were to be accompanied by another soft CPI report next month, the Fed narrative would likely shift back into more dovish territory, with markets promptly following suit.

Macro views

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