December CPI Report Forecast Shows Core Inflation Slowing as Markets Await Rate Cuts

Forecasts for December’s Consumer Price Index report center on it showing a slight increase in overall inflation, but with good news elsewhere once volatile food and energy costs are factored out.

With Federal Reserve officials expressing more confidence that the battle against inflation has been won, investors will be closely watching the CPI report when it is released at 8:30 a.m. EST on Friday, looking for confirmation that the central bank will be able to cut interest rates when it meets in March.

According to FactSet, the overall CPI reading is forecast to come in at a 3.2% annual rate of growth in December. That’s slightly higher than the 3.1% growth reading in November, but significantly lower than the 6.5% reading from December 2022. On a monthly basis, analysts are expecting 0.2% growth in December, up from 0.1% in November.

December CPI Forecast Highlights

• The CPI is forecast to rise 0.2% in December after rising 0.1% in November, according to FactSet.
• Core CPI is forecast to rise 0.25% in December after increasing 0.30% in November.
• The CPI year over year is forecast to rise 3.2% in December after increasing 3.1% in November.
• Core CPI year over year is forecast to rise 3.8% in December after rising 4.0% in November.

“Prices continue to fall at a rapid clip” compared to the beginning of 2023, says Andrew Patterson, senior international economist in Vanguard’s Investment Strategy Group. But he doesn’t anticipate that the Fed will reach its inflation target of 2% until very late this year, or more likely in early 2025.

Hotter-than-expected jobs data released last week momentarily spooked investors, but overall, the labor market appears to be slowing down. It’s one sign that the Fed’s interest rate hikes over the past two years haven’t done major damage to the rest of the economy.

Thursday’s inflation report will be another major piece of the puzzle. Patterson is expecting an overall inflation reading between 3.2% and 3.3%, and a core CPI (which excludes food and energy) between 3.8% and 3.9%. The slight uptick in the headline number could be caused by retailers discontinuing holiday discounts, he explains.

Analysts from UBS expect both core and overall inflation to rise compared to December, but they don’t believe this result would change the Fed’s course. “The basic thrust of incoming inflation data remains true: inflation has slowed notably faster than the FOMC was expecting,” they wrote last week.

Goods Sector Sees Deflation While Services Inflation Slows

In recent months, goods inflation has decelerated rapidly, while core inflation has remained stickier. Analysts at Bank of America expect this pattern to continue in December, as a decline in used car prices pushes goods inflation lower while sticky rent prices push services prices higher. “We expect core goods and core services to continue to paint two different pictures,” they wrote in a Tuesday note to clients.

Patterson says he’s focused on services inflation, which has been falling faster than he anticipated, though those declines have yet to outpace the outright deceleration in the goods sector.

Many economists expect evidence of falling rent prices, which tend to lag other economic data points, to show up in government inflation reports in the coming weeks and months. “We should start seeing [shelter prices] ease,” says Jeffrey Roach, chief economist for LPL Financial. That would help push services inflation even lower.

When Will the Fed Cut Rates?

Market participants are currently pricing in for the Fed to make roughly five rate cuts in 2024, according to the CME FedWatch Tool. Bond market data shows a 64% chance of the first cut arriving in March. That probability has fallen slightly over the past week, in the wake of December’s strong employment report.

A core CPI report reading that comes in line with Patterson’s forecast of 3.8%-3.9% would be in line with last month’s data, and for that reason, it would be unlikely to move market expectations for the Fed.

Bank of America’s analysts add that a hotter-than-predicted CPI report could “keep the Fed in wait-and-see mode” and potentially push rate cuts to later in the year.

Patterson is paying more attention to communication from Fed officials over the past few weeks, which he believes implies they are more likely than not to keep rates on hold for longer than the market anticipates. “That probably has the potential to move markets more than any one inflation print,” he says.