US core inflation rose at its weakest pace in almost 5 years. What to expect from the Fed?

The Consumer Price Index (CPI) in December remained at the same level as it was in November. However, in basic terms, which excludes volatile food and energy prices, it added 2.6%, which was the lowest increase in almost five years. Analysts had expected a slightly worse result. But the slowdown in price growth is unlikely to prompt the Fed to cut rates further at its January meeting.

CPI in December in the US increased by 2.7% in annualized terms, the same as in November, the US Bureau of Labor Statistics reported. In monthly terms, the increase amounted to 0.3%. In underlying terms, the index added 0.2% month-on-month and 2.6% year-on-year, the latter figure being the lowest since March 2021, Yahoo Finance wrote. Economists had expected the core CPI to rise 0.3% and 2.7%, respectively, the publication noted. Only 11 of 73 economists surveyed by Bloomberg predicted an increase in core inflation by 0.2%: for most of the actual data came as a surprise, the agency said.

The main reason for the increase in core inflation in December was housing: prices added 0.4%. At the same time, the cost of used cars and home furnishings declined. The December data were expected to accelerate inflation as the distortion effect of the U.S. government shutdown gradually wears off, Reuters wrote. Against this background, the price increase of only 0.2% in monthly terms looks even softer, Bloomberg said.

U.S. stocks rose in the premarket after the release of statistics. Futures on the S&P 500 index added 0.2%, exchange-traded contracts on the Nasdaq 100 increased by almost 0.2%, Dow Jones - by 0.1%. Yields on two-year bonds of the U.S. Treasury Department were declining, Bloomberg noted.

The U.S. Federal Reserve monitors inflation statistics to make decisions on interest rates. CPI data are unlikely to lead to a new rate cut, but at first glance they play into the hands of the Fed, Bloomberg believes.

"A 2.7% year-over-year increase means the PCE deflator (consumer spending index - the Fed's preferred measure of inflation. - Oninvest) below 2.5%, which opens the door for the Fed to take a more dovish stance. We still don't believe that a rate cut in January is a done deal, but such a possibility is emerging in March," said Ira Jersey, Bloomberg Intelligence's senior U.S. rate strategist.

Following the release of December CPI data, markets were pricing in about a 95% chance of interest rates remaining in the 3.5-3.75% range following the Fed's Jan. 27-28 meeting, according to CME Group.

"At a time when a Fed rate cut is in doubt, the soft December CPI brings relief and suggests it is too early to write off the Fed's dovish bias this year. At the same time, it means it may be premature to abandon the negative outlook for the dollar due to the Fed in 2026," said Bloomberg Intelligence senior G-10 currency strategist Audrey Child-Freeman.

This article was AI-translated and verified by a human editor