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Inflation on Bumpy Path Back to 2%
Inflation on Bumpy Path Back to 2%
Inflation on Bumpy Path Back to 2%
Inflation on Bumpy Path Back to 2%
Inflation on Bumpy Path Back to 2%

Inflation on Bumpy Path Back to 2%

Jan. 11, 2024
Oxford Economics notes December rise in consumer prices won't help much with inflation rate goal.

The consumer price index (CPI) rose 0.3% last month after nudging up 0.1% in November, the Labor Department's Bureau of Labor Statistics said on January 11.

Michael Pearce, lead US Economist at Oxford Economics, offers the following analysis.

The larger than expected 0. 3% rise in consumer prices in December will reverse some of the more aggressive rate cut bets this year, but it does not change our view that inflation is on a bumpy path back to the 2% target. We expect the first rate cut to come in May and the Fed to deliver 75bps of cuts this year, less than what markets are currently pricing. 

Headline and core prices rose a touch faster than we thought last month, with part of that surprise because used and new vehicle prices rose unexpectedly. The declines in auction prices and the recovery in new vehicle inventory suggest vehicles prices will fall in the months ahead.

Broader good prices pressures remain subdues, helped by easing supply chain conditions, though bottlenecks in the Panama Canal and the surge in global shipping prices because of attacks on commercial shipping in the Red Sea pose an upside risk to inflation. 

Crucially for the Fed, there were continues signs of gradual disinflation in services. Shelter inflation is ending lower and will continue to fall over 2024. 

Excluding shelter, services prices rose by 0.6%, the same as in November, but the implications for the Fed are not clear. That is being boosted by a rise in CPI medical care inflation, but that won't be replicated on the Fed's preferred PCE measure because it uses a different methodology and different source data. 

The trend in broader services inflation will be determined by the strength of wage growth, which is still cooling, thanks to the ongoing normalization in labor market conditions. As long as we get further evidence that the job market is continuing to slow over the coming months, we still think the Fed will be on track to deliver its first rate cut in May.

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