US CPI / ISM

The US December CPI numbers came marginally above expectations yesterday, with an increase of 0.3% for the month, versus a consensus of 0.2%, and a previous of 0.1%. On the yearly reading, CPI closed 2023 up 3.4% against the estimate of 3.2%, and a previous of 3.1%. However, although higher than the market was expecting, the headline reading is still a long way from the 6.4%yoy print in December 2022 and the over 9%yoy seen 18 months ago.  
 
Stripping out food and energy prices, the December core CPI was released at 0.3%mom, and 3.9%yoy, above the anticipated 3.8%yoy, and the 4%yoy prior reading. The annual basis core reading was the lowest since May 2021. 
  
Digging into the figures, we see that much of the increase resulted from rising shelter costs. This was 0.5% higher on the month, and accounts for more than half the core CPI increase. On an annual basis, shelter costs increased 6.2%, so about two-thirds of the rise in inflation. Airfares and used car prices were also above forecast.  
 
However, as always, end-of-year data tends to be “noisy”, with the market usually reluctant to make too much of any small misses, the trend being seen as more important. This was evident in the futures market pricing before, immediately after and this morning. Before the release, money markets were pricing a 70% chance of the first rate cut in March, dropping to 60% immediately after the release. At the time of writing, markets are now pricing a 73% chance.  
  
Also, still fresh in the minds are the December ISM services employment numbers which plummeted; the release followed the strong non-farm payroll print. Expectations were for 51, with the previous reading at 50.7. However, the number came in at 43.3, a 3.5 year low. Services make up 85% of the US economy, so this could be a warning signal.  
 
After the release, we heard from a couple of Fed members. Barkin said that he is open to lowering rates once inflation is on track to target, however, he is still looking for conviction that is the case. He said he’s paying close attention to 1- to 3-month PCE inflation. On the CPI number, he said it was “about as expected” but that he wouldn’t be surprised if it takes some time for CPI to converge to target. Mester said that March is “probably too early for a rate cut” and that the CPI shows that the inflation job isn’t done, although her forecast is for inflation to continue falling. She also said that the slowdown for QT is not imminent, but that the Fed will begin to discuss it this year.