The December Consumer Price Index (CPI) showed that inflation was slightly stronger than expected, taking annual headline inflation back up to 3.4% while core inflation eased slightly to 3.9%. Inflation progress has slowed in recent months, reinforcing the notion that it will be an arduous and rocky path back towards the 2% target and, as such, the Fed pivot may arrive slightly later than the market currently anticipates.

Report details

  • Monthly headline inflation rose 0.3% in December, above the 0.2% consensus expectation. As a result, annual headline rose from 3.1% to 3.4%, the highest level in three months. Monthly core inflation rose 0.3%, bringing the annual rate down from 4.0% to 3.9%. While annual core inflation was slightly higher than expected, it is notable that it is now below 4% for the time since May 2021.
  • Core goods inflation was unchanged, suggesting that its deflationary trend has come to a halt. By contrast, core services inflation was slightly stronger than expected. With much of the disinflationary momentum in core goods having faded in recent months, core services disinflation will need to accelerate to compensate.
  • Core services ex-housing inflation, often called supercore inflation, remained steady at 3.9% in December. The monthly increase also remained unchanged at 0.4%, suggesting some concerning stickiness in the data. If anything, this measure calls for continued caution from the Fed.

The upshot of today’s data is that the Fed does not yet have sufficient evidence that inflation is sustainably heading back to target. While the market rightfully remains confident that a Federal Reserve policy pivot is likely this year, the incoming inflation and economic activity data are building up a strong case for a move in mid-2024 rather than earlier.


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