Expected Premium US CPI Up 3.4%... Will Interest Rate Cut Timing Be Delayed?

Thanks to the cumulative effects of monetary tightening, the US consumer price inflation rate, which had been showing a disinflation trend, rebounded to the mid-3% range in December last year. This was mainly due to persistently high housing cost increases. As a result, there are forecasts that the Federal Reserve's (Fed) first interest rate cut may be delayed beyond market expectations.

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According to the US Department of Labor on the 11th (local time), the US Consumer Price Index (CPI) in December last year rose 3.4% compared to the same month the previous year. This exceeded both the previous month's increase (3.1%) and Wall Street's forecast (3.2%). It was also the highest figure in three months since September last year when it recorded 3.7%. The CPI inflation rate has been on a slowing trend since peaking at 9.1% in June 2022, but recently has been moving in the mid-3% range. The December CPI also rose 0.3% month-on-month, surpassing Wall Street's forecast of 0.2%. This was the same as the previous month's increase.

Core CPI, which excludes the volatile energy and food sectors, rose 3.9% year-on-year and 0.3% month-on-month. Experts had predicted 3.8% and 0.2%, respectively. However, the year-on-year increase fell below 4%, continuing the core inflation slowdown trend. The core CPI, which shows the underlying trend of inflation, is a relatively more important indicator for the Fed when making monetary policy decisions.

The rebound in CPI was largely due to housing costs. The Department of Labor explained that housing costs, which account for 35% of the CPI weighting, rose 0.5% month-on-month, contributing half of the December CPI increase. Housing costs also rose 6.2% year-on-year. Although rent increases in the US have recently slowed, there is a time lag before new lease contracts are reflected in the data. Fed officials consider these housing costs as the key to achieving the 2% inflation target, and expect a slowdown trend starting this year as price reductions from new lease renewals are reflected. Along with this, energy prices also rose 0.4% in one month, contributing to inflation. Electricity rates jumped 1.3%. Auto insurance premiums and used car prices also increased by 1.5% and 0.5%, respectively. The average real hourly wage in December rose 0.2% month-on-month and 0.8% year-on-year, maintaining the same level as in November.

Anna Wong, an economist at Bloomberg Economics, evaluated, "The surprisingly strong CPI figure in December shows that the return to the 2% inflation target will be difficult and that the last mile could be challenging." John Meyer, Chief Investment Officer at GlobalX, said, "This CPI rebound is an important signal reminding us that economic recovery predictions are unpredictable and macroeconomic data is uncertain," adding, "The Fed may potentially strengthen or maintain its restrictive monetary policy stance in response to these inflationary pressures."

With the December CPI inflation rate rebounding to the mid-3% range, the Fed's dilemma ahead of an interest rate cut decision is expected to deepen. John Williams, President of the New York Federal Reserve Bank, known as the third most influential Fed official, acknowledged recent disinflation progress in a speech the day before but emphasized, "We are still far from the target (2%). To fully achieve the target, it is necessary to maintain a restrictive policy stance." He pointed out that inflation in the services sector remains high, unlike in the raw materials and commodities sectors.

However, the Personal Consumption Expenditures (PCE) price index, an inflation indicator that the Fed values more than the CPI, continued its slowing trend at 2.6% as of November last year, supporting expectations for an early rate cut. Despite growing caution that recent market expectations for rate cuts are overly optimistic, the interest rate futures market still favors a rate cut scenario in March. According to the Chicago Mercantile Exchange (CME) FedWatch, even after the CPI release on this day, the futures market reflects about a 67% chance that the Fed will cut rates by at least 0.25 percentage points in March.

The unemployment data released on the same day also reaffirmed a still-robust labor market. According to the Department of Labor, new unemployment claims for the week of December 31 to January 6 totaled 202,000, down 1,000 from the previous week. This was below Wall Street's forecast of 210,000. However, local media assessed that the increase in labor demand during the year-end and New Year holidays may have partially influenced this. The number of continuing unemployment claims, which are claims for unemployment benefits for at least two weeks, was 1,834,000, down 34,000 from the previous week.

Meanwhile, the New York stock market opened lower across the board on the day due to the stronger-than-expected CPI.

This content was produced with the assistance of AI translation services.