The monthly consumer price index report will be coming out later today. The report covers the month of December and will give investors significant insights into the new year.
According to the economists polled, the general consensus points to a 0.2% increase on a month over month basis, for both headline and core CPI. This marks a slower pace of increase in consumer prices. In November, headline CPI rose 0.3%.
On a year over year basis, inflation is forecast to remain stable at 2.3% on core and 2.0% on the headline. This puts inflation right on the Fed’s inflation rate target. However, despite the increase in inflation, Fed officials will be staying on the sidelines.
This comes as inflation in the United States (as with most parts of other global economies) has become very sluggish. After years of such slow inflation growth, monetary policy officials are willing to let inflation run above target for a while.
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Although today’s inflation data is not one of the metrics followed by the Federal Reserve, it still garners a lot of attention from mainstream investors.
Inflation, alongside full employment, are the two mandates that the Fed controls. While the unemployment rate is near a 50-decade low, there are still some concerns. The recent payrolls report saw wages easing while the pace of jobs added was also softer than expected.
Amid these two, the general consensus is consistent with the view that the Fed will remain on the sidelines.
In some aspects, investors are pricing in the prospect of inflation beating estimates. Thus, even a higher reading is unlikely to do much in terms of market reaction in the longer term.
Overall, December is considered to a stable or tame month as far as price pressures are concerned.
December Inflation Could Rise Higher on Gasoline Prices
One of the components that will heavily influence the inflation report is the price of gasoline.
Gasoline prices are volatile on a month to month basis. In November, while gasoline prices fell over 4% on the year in November, they rebounded in December. For December, the estimates show that gasoline prices rose over 5% on a year over year basis.
This could potentially push inflation well past the current levels of 2%. But at the same time, the retail food prices and the core components could offset the gains.
Oil prices have been generally trending higher in December. This could potentially lead to higher energy prices over the month. Thus, there is a good chance that the headline inflation rate could rise above the estimates.
The inflation data comes on the back of the recent jobs report. Although the headline items seem to be well in line with the Fed’s target levels, the general economy remains weak.
For the moment, investor expectations on rate cuts remain stable. That is to say that investors expect the central bank to lower rates over the course of the year. This falls in contrary to the Fed’s projections.
The Federal Reserve, at its December meeting, signaled that interest rates could remain steady through the course of the year. But a lot of this will depend on how the bank will assess the incoming data.
The US economy is also a major part of the overall picture. Currently, the economy is forecast to grow sluggishly with the idea that growth rate will average around 2.0% through the course of the year.
Today’s inflation report might not bring about much of a market reaction in the longer term as the upside looks to be priced in already.