December’s inflation data provided just enough evidence to show that the pace of price increases is continuing to cool while also serving up a reminder that the war isn’t won yet. Separate Labor Department reports showed that the prices consumers pay increased a bit more than expected and still were running well north of 3% on a year-over-year basis , while core wholesale prices even declined in December, leaving increases running at an annual rate of just 1%. Markets absorbed both pieces of key data and concluded that, if nothing else, the Federal Reserve could soon start rolling back interest rates and even might stop cutting its bond holdings. “Disinflation is continuing, but progress is uneven,” Nomura Global Economics said in a client note that mirrored much of the Wall Street commentary after the consumer price index and producer price index releases last Thursday and Friday. While stock market traders weighed the data points against more disturbing news in the Red Sea, those in the fed funds futures market ramped up bets that the Federal Reserve’s path is clear towards policy easing. Odds of a March rate cut jumped to about 80% Friday afternoon, despite cautionary statements throughout the week about inflation and the trajectory of monetary policy, according to the CME Group’s FedWatch tracker. Even JPMorgan Chase CEO Jamie Dimon weighed in Friday, cautioning in the bank’s earnings release that inflation could be stickier than thought and interest rates could stay elevated. The case for cutting Markets appeared to grow more convinced, particularly after the negative PPI print , that the Fed not only was done hiking but soon could start lowering benchmark rates. “This is a ‘good news’ print overall and will be welcomed by the Fed,” wrote Krishna Guha, head of global policy and central bank strategy at Evercore ISI. “It helps the case for a cut in March, though we still favor May or June for the first cut.” PPI has a few advantages for prognostication, particular in this climate: Because it measures pipeline prices that producers get for their goods, it tends to be a better leading indicator, and it doesn’t measure residential housing costs, important because the Fed is particularly focused these days on services costs minus housing. The thinking at the central bank is that the CPI’s measure of hypothetical rents that owners could get for their homes, which is about one-third of the index’s weighting, are backward-looking and likely to diminish through the year. As such, both Citigroup and Goldman Sachs said that a key measure that policymakers do follow, the Commerce Department’s core personal consumption expenditures index, is likely to show inflation at 2.9% in December. That gets the central bank even closer to its 2% goal. In addition, Goldman said the Fed even could start tapering its balance sheet runoff in May, a fairly big walk-back from previous expectations for the fourth quarter. The firm now sees the quantitative tightening process ending entirely in the first quarter of 2025. “Core PCE is what matters for the Fed, and these data will increase the pressure on policymakers to ease soon,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics. “We’re sticking to our March call, though a delay until May would be no big surprise.” What could go wrong The Fed and the market are generally pretty in tune on rate cuts, but there are some reasons why this time could be different. One is that regardless of the headline numbers, the parts of inflation that don’t fluctuate as much have been fairly stubborn. So-called sticky inflation, which includes things such as housing costs, auto insurance, medical care services and household furnishings, are indeed holding higher. The Atlanta Fed’s Sticky Price CPI gauge showed that group up 4.6% on an annualized basis in December, down just slightly from November. On a one-month annualized basis, the measure also was at 4.6%, but that’s up a full percentage point from the previous month. Fed policymakers also are attuned to the relationship between wages and inflation. The Atlanta Fed’s wage growth tracker held at 5.2% in December, unchanged from November and indicative of potential wage-price pressures that helped propel some of the inflationary surge. The inflation measures overall, and particularly the PPI reading, point to “steady progress towards the Fed’s 2% goal,” said Dan North senior economist with Allianz Trade Americas. “However it does not suggest prices are going down, it simply means that prices will still be rising at a slower rate.” North pointed out that even as real wages rose 0.8% on an annual basis in December, consumers are still in the hole from when inflation first started to surge in 2021. “Since January of 2021, wages have risen 14%, but the things that wage earners need to live have risen even faster: food is up 20%, housing is up 30% and gasoline is up around 40%,” he said. “Slower inflation is good, but the damage is done and will take a long time to repair.”
