ON DECK FOR THURSDAY, JANUARY 11
KEY POINTS:
- Markets await US CPI—and will probably overreact no matter the outcome
- Will core inflation continue its reemergence from a temporary soft patch?
- Key is how long core goods disinflation can continue as an offset to core services inflation
- Is inflation risk pointed higher again?
The main focal point today will be US CPI for December (8:30amET). Whatever the outcome, I wouldn’t be the least surprised to see markets overreact to a single print given their volatile, whippy tendencies in our times. Overnight developments were light as the Bank of Korea held as widely expected and leaned again premature easing, and data flow was light. Early positioning appears to be poised for a relatively soft outcome with rates mildly rallying along with most equity benchmarks. An upside surprise would likely have the opposite effect in terms of Fed pricing, but even at that it’s going to take more data to impact the Fed’s timing than one report especially if you think—as I do—that we may be at another inflection point that is slanted to upside risks to inflation.
Year-over-year measures are more of a base effect story whereas to evaluate inflationary pressures at the margin we need to look at month-over-month changes and in the context of trends. To that effect, core and headline CPI are expected to rise 0.3% m/m SA.
If this estimate pans out, then it will confirm that the mild softening in October was the aberration along the five-month trend. The trend since then may come to be marked by a mild reacceleration (chart 1). That five-month m/m SAAR core CPI trend could be tracking just shy of 3½% which would remain too hot for the Fed. While each successive soft patch on core inflation gives way to milder rebounds in their wake, the pattern is still ongoing (chart 2).
I didn’t know consensus upon submission, but as it turns out, 0.3% m/m SA is the modal and median estimate with 36 economists in that camp. Another 27 expect 0.2% and three expect 0.1. Two nowcast estimates also point to 0.3% m/m (chart 3).
Keys will be how much longer core goods disinflation can continue (chart 4) as a mitigating offset to still-hot core services inflation (chart 5).
Among the expected drivers are the following:
- Gasoline prices were down by 5.2% m/m NSA. Since gas prices are normally a bit weaker in December the seasonal adjustments translate this into a nearly flat m/m contribution to headline CPI such that it shouldn’t matter to the difference between headline and core CPI. The US prints CPI m/m in SA terms and that’s what consensus is asked to estimate, versus other markets like the UK and Canada where consensus estimates NSA m/m changes.
- Food prices are not expected to be a material contributor. Therefore, here too there should be little reason to expect a difference between headline and core CPI in m/m terms.
- Owners’ equivalent rent and rent of primary residence are tracking further increases of about ½% m/m SA.
- Core service prices (ex-housing and energy services) are expected to rise by 0.3% m/m SA.
- Seasonally adjusted vehicle prices could contribute a touch to headline and core CPI through a mild rise in new vehicle prices. Used vehicle prices were little changed.
As for a few of those upside risks at a potential inflection point? Supply chains are getting rattled again, for one (chart 6). It’s nothing like it was during the pandemic so far, but the direction and speed of adjustment is pressuring shipping costs at a relatively rapid rate. Wage pressures have recently accelerated once more. If everyone’s forecast for US growth to wane in 2024H1 come true, then that will probably mean that the productivity surge over recent quarters was a flash in the pan. Financial conditions have sharply eased off the peak for prior tightening. Fiscal stimulus remains strong.
Also on tap will be US initial jobless claims (8:30amET) followed by more Fed-speak. Cleveland’s Mester (11:40amET) and Richmond’s Barkin (12:40pmET) will speak. The US monthly budget balance for December lands at 2pmET.
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