Inflation Rate Slowed Down to 6.5% in December: What Can We Expect from the Fed?

Inflation cooled down to 6.5% in December, compared to consensus estimates of 6.5%, according to the new CPI print. Core CPI stood at 5.7%, while economists expected a 5.7% annual increase.

Core CPI Down at 5.7%

The U.S. Bureau of Labor Statistics published the first consumer price index (CPI) report of the year, showing that the annual inflation rate fell to 6.5% in December. This compares to the November CPI of 7.1%, while analysts were expecting 6.5%.

Month-over-month, inflation cooled by 0.1%, compared to the 0.1% increase last month. Analysts were expecting the month-over-month CPI to remain unchanged.

Core CPI, which does not take volatile food and energy prices into account, fell to 5.7% from 6% in November, while analysts were looking for 5.7%. On a monthly basis, core inflation increased by 0.3%, compared to analysts’ estimates of a 0.3% increase.

The pan-European Stoxx 600 index rose to its highest level since April 2022 ahead of the CPI report, pushing all sectors into the green. The index was up around 0.58% Thursday morning, led by gains in travel and leisure stocks.

Elsewhere, US stock futures remained almost unchanged in overnight trading Wednesday. In contrast, Asia-Pacific stocks were mixed as investors awaited the new CPI report to gain more insight into the outlook for the Federal Reserve’s monetary policy.

Fed Officials Say Rates Should Remain Elevated

While the new CPI report provides more clarity, several Fed policymakers, including Atlanta and San Fransisco Fed Presidents Raphael Bostic and Mary Daly, are still in favor of keeping interest rates elevated. Speaking to the Atlanta Rotary Club earlier this week, Bostic said, “we are just going to have to hold our resolve.” When asked how long he saw interest rates above 5%, he replied, “Three words: a long time.”

“I am not a pivot guy. I think we should pause and hold there, and let the policy work,” he said.

– said Raphael Bostic, President of the Atlanta Federal Reserve

Credit Agricole’s head of G-10 FX research and strategy Valentin Marinov, said the mix looks positive enough for the US central bank to keep hiking interest rates. Still, investors are waiting to hear from Fed chairman Jerome Powell to get a better sense of the Fed’s policy plans.

The Federal Reserve slowed the pace of interest rate hikes in December to 50 basis points (bps) after delivering four consecutive 75 bps jumbo increases throughout last year. The central bank moderated the pace of rate increases after the December CPI report showed that inflation cooled down in November.

Do you think the Fed is more likely to slow the pace of rate hikes even further following the new CPI print?