We're not going to say this hotter-than-consensus CPI print wasn't disappointing. It was also probably wrong, contradicted by the real-time Truflation measure, and our own similar model, which both pointed so slight deflation on the month. More than a third of the headline inflation for December was owner's equivalent rent of primary residences, which includes data as much as two years stale. So far markets have taken out about 10 bp of probability for a rate cut in March. We get two more bites at this apple -- two CPI reports to go before the March FOMC. Nothing in this single month of data changes anything.
What you’re not hearing about inflation and the coming rate cuts
Tuesday, January 16, 2024
Was December inflation really such a miss? It marked four months in a row below the Fed’s target.
Update to Strategic View
December CPI, both headline and core, came in hotter than consensus expectations last week. But the truest measure of inflation, core CPI ex-OER, has now been below the Fed’s target for four months in a row. We are still expecting deflation. In December the vast majority of the goods and services categories measured in CPI were below the Fed’s target, and more than a quarter were in outright deflation. Only seasonal adjustments kept December CPI positive. Inflation expectations are at the lowest in three years. Even if deflation doesn’t come, the Fed will make the first rate cut at the March FOMC because there is no reason to maintain an admittedly restrictive policy posture when inflation is back to target. Even after last week’s disappointments, markets continue to be aligned with our long-standing forecast for the first cut in March.