On Thursday (11th) local time, the United States will release the Consumer Price Index (CPI) data for December of last year.
With less than three weeks left until the next meeting of the Federal Reserve, the direction of the anti inflation trend may become a basis for when a policy turning point will be reached this year, as it releases signals to begin considering interest rate cuts. The employment data released last week showed that the resilience of the labor market may become a reason for the Federal Open Market Committee (FOMC) to remain patient. The pricing of interest rate cuts in the derivatives market has shrunk, and the latest inflation report may once again affect the market and the Federal Reserve's judgment on the first rate cut node.
Overall prices may experience a slight rebound
In recent months, although rent has continued to be a driving force, the overall inflation level in the United States has remained in a downward trend due to continued pressure on commodity prices. With the global crude oil market starting to weaken in October last year, the slowdown in price indicators has further accelerated.
However, the latest forecast from institutions shows that the overall inflation CPI in the United States will rebound from 3.1% to 3.2% last month, with a month on month growth of 0.2%. From the perspective of energy prices, the short-term boost from OPEC+production cuts and the Red Sea crisis has not reversed investor confidence, and oil prices are still being suppressed by expectations of weak demand.
The core CPI growth rate in November last year dropped to 4%, reaching the lowest level in two years. Institutions predict that it will further drop to 3.8% last month. As a predictive indicator for the Federal Reserve to observe future inflation trends, core inflation has consistently been around twice the medium-term target in the past few months. It should be noted that the Cleveland Federal Reserve's inflation model shows that the month on month growth rate of core CPI in December may exceed 0.3%, reaching a new high in nearly half a year.
Housing costs are the main factor driving core inflation. Last November, rent increased by 0.5% month on month and 6.9% year-on-year, accounting for nearly 70% of the month's CPI growth. Industry statistics show that the vacancy rate in the United States reached a new high in over two years in the third quarter of last year, and rental inflation may significantly slow down in the future, with a large number of apartment buildings being prepared.
Real estate brokerage firm Redfin said on Monday that compared to the previous year, the median rent in December in the United States decreased by 0.8%, marking the third consecutive month of decline.
Institutions generally believe that if housing costs continue to decline, inflation may accelerate towards the Federal Reserve's goals.
Driven by the increase in doctor services and prescription drug costs, healthcare costs increased by 0.6% in November last year, further accelerating from October last year, which may become a factor in future price fluctuations. Considering the revision of the method used by the US Bureau of Labor Statistics to calculate healthcare insurance prices, healthcare insurance costs have rebounded. The impact of the new program may continue into the first half of this year and have a certain impact on the inflation rate.
Due to concerns about the impact of the six-week UAW strike starting in September, wholesale prices of used cars have briefly risen, rising by 1.6% in November last year, breaking the trend of continuous decline in the previous five months.
But the latest data may fall again, with the Manheim second-hand car wholesale price index falling by 0.5% from November and a year-on-year decrease of 7%. Since last year, second-hand cars have been the main driving force of commodity deflation.
When will the Federal Reserve cut interest rates
From last December's interest rate meeting, it can be seen that the Federal Reserve's policy stance is undergoing subtle changes. The minutes of the meeting show that the committee did not use "unacceptably high" to describe inflation, which is FOMC's recognition of the progress made in easing price pressures. Most Federal Reserve officials believe that monetary policy is having expected effects and will continue to work by suppressing household and corporate spending and bringing inflation back to targets.
According to the Federal Reserve's forecast, inflation may need to wait until the mid-term target is reached by 2025, so the committee remains vigilant internally and continues to monitor the performance of economic data, especially the state of the labor market.
Bob Schwartz, senior economist at the Oxford Institute of Economics, said in an interview with First Financial reporters that the labor market has made significant progress in balancing supply and demand, which is good news for the prospects of a soft landing for the Federal Reserve. However, achieving the inflation target is clearly far from enough. Schwartz analyzed that, as Federal Reserve Chairman Powell said, the direction of the labor market depends on the demand side, where employment growth is slower than the supply side brought about by labor growth and immigration.
Although the December non farm report far exceeded expectations, Schwartz tends to see some distortion in the data due to seasonal and other factors. In the past few months, there have been multiple signs of weakening in the trend of employment growth. He predicts that by mid-2024, the growth rate of employment will slow down to 100000 people per month, while the unemployment rate will rise to over 4%.
Oanda market analyst Craig Erlam holds a cautious view on whether the Federal Reserve can cut interest rates in March. He told First Financial that the labor market and overall economy still seem strong enough to continue the current expansion. Given that core inflation remains too high, it is difficult to believe that the Federal Reserve will begin to shift in the short term. "There is significant disagreement among policy makers on the future interest rate path. The mainstream view now is still to keep the target interest rate high and maintain a restrictive stance to further reduce prices."
Schwartz believes that there is significant uncertainty in the policy outlook regarding interest rate cuts. Economic data and communication with Federal Reserve officials have led to fluctuations in market pricing. From the current situation, the conditions for a rate cut in March are not yet mature, and it seems too early. The Federal Reserve may need several more months to fully believe that it will achieve its final inflation target.