U.S. consumer prices rise moderately – Interest rate cuts back in discussion

Consumer prices in the USA recorded a smaller increase in December than expected, which is considered an encouraging step and halted the sharp downturn in the bond markets. This led to new speculation about a possible faster interest rate cut by the US Federal Reserve. The core consumer price index, which excludes food and energy costs, rose by 0.2% after having increased by 0.3% for four consecutive months, the Bureau of Labor Statistics reported on Wednesday. This was the first decline in the rate in six months, aided by cheaper hotel stays, lower health care cost increases, and moderate rent rises. However, for the Fed, this decline is not yet convincing enough to initiate immediate rate cuts. Persistent price increases had led to sales in the bond markets worldwide and fueled concerns that the Fed had loosened its policy too quickly the previous year. With the recently published robust labor market report, many market participants still expect the Fed to keep rates stable at its meeting later this month. However, some economists view a rate cut in March as possible based on the report. Following the release of the December data, government bond yields fell, the S&P 500 opened higher, and the dollar lost value. In addition to food, price drivers included airline fares and new and used cars. Service prices excluding housing and energy costs rose by 0.2%, the smallest increase since July. The main reason for this development is rents, which constitute the largest category within services. Analysts at Bloomberg Economics consider the moderate increase in the core CPI a sign of ongoing disinflation. Combined with the producer price indices, some expect that the Fed's preferred inflation measure, the Personal Consumption Expenditures Price Index (PCE), will also result in a value acceptable to the Fed. Along with recent wage data showing a real annual growth of 1%, this will serve Fed officials as one of the last major economic signals before they meet at the end of January. Despite cautious tones in recent speeches, they adhere to a cautious approach regarding interest rate adjustments.