Inflation Easing, But Cautious Stance Maintained
US Producer Price Index (PPI) and Consumer Price Index (CPI) data came in below expectations in December, triggering a notable market response. The core CPI's modest 0.2% monthly increase, down from 0.3%, sparked optimism in financial markets, with S&P 500 futures surging 1.5% and US Treasury yields retreating 13bps to 4.67% following the release.
Whilst the moderation in US inflation benefited from decreases in hotel accommodation costs and slower growth in medical care services and rents, energy costs remained a significant concern, driving over 40% of the headline CPI's 0.4% monthly increase. The commodity markets paint a complex picture, with raw materials prices declining in the PPI figures, yet we note an upward trend since mid-December. Moreover, Russian oil sanctions continue to pose potential upside risks to energy prices.
As it was released yesterday, it would be remiss not to highlight the key points noted in the Fed’s Beige Book. The 12 districts reported modest to moderate economic growth in late 2024, marked by strong holiday retail sales and mixed results across sectors. While manufacturing declined slightly and wage pressures eased, businesses expressed cautious optimism about 2025. The report noted ongoing concerns about immigration and tariffs.
Closer to home, the UK also witnessed an unexpected improvement in its inflation outlook, with the headline rate easing to 2.5% in December 2024. Services inflation showed a marked improvement, falling to 4.4% from 5.0%, whilst core inflation decreased to 3.2%. This positive data prompted markets to price in two BoE rate cuts for 2025, with gilt yields dropping off 17-year highs witnessed earlier this week, while sterling bounced off its 14-month lows.
Both economies face significant uncertainties. In the US, the Fed appears likely to maintain current rates this quarter, given resilient employment data and the need for sustained evidence of cooling inflation, as emphasised by both Williams and Barkin yesterday. The impending Trump presidency and potential tariff policies add another layer of complexity to the inflation outlook. Meanwhile, the UK grapples with potential stagflation risks, as evidenced by this morning’s anaemic 0.1%mom and 0% three-month GDP releases. However, the BoE’s preferred measure of underlying price pressures shows encouraging signs of moderation; expectations are that the central bank will cut in February.
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