The December Consumer Price Index (CPI) report, set to be released by the Bureau of Labor Statistics on Wednesday, is anticipated to reveal a fifth consecutive month of substantial increases. This persistent rise in consumer prices is likely to reinforce the argument for the Federal Reserve to maintain its current pause on interest-rate reductions. Economists predict a 0.3% increase in the core CPI, excluding volatile food and energy prices, and a 0.4% rise in the overall index.
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This report arrives at a crucial juncture for both investors and policymakers. Since the November CPI release, the yield on 10-year Treasury notes has surged by over half a percentage point, reflecting renewed anxieties about inflation. While the median forecast for core CPI growth is 0.3%, there’s a notable division among experts, with 39 economists aligning with the median projection and 32 anticipating a more moderate 0.2% increase.
Bloomberg economists Anna Wong and Chris G. Collins highlight the report’s potential to amplify concerns about stagnating disinflation. They suggest that a robust CPI figure, combined with other anticipated macroeconomic data this week, could push the 10-year Treasury yield beyond 5%.
Key Components of the December CPI Report
Several key components within the CPI report warrant close attention, as they will offer insights into the underlying inflationary pressures within the US economy.
Rent Prices
Owners’ equivalent rent (OER) and rent of primary residence, significant constituents of the CPI, experienced their slowest growth since early 2021 in November. This slowdown fueled expectations of a sustained deceleration in rent inflation. However, given the volatility observed throughout 2024, analysts generally anticipate a slight rebound in December. The extent of this increase will be pivotal in determining the overall core CPI figure. Economists at Morgan Stanley suggest that while both rent metrics are likely to accelerate, they will probably remain below the underlying trend for the year. A weaker rebound in rents could contribute to a core CPI below 0.25%.
Travel Costs
Travel-related categories, such as lodging away from home, airline fares, and food away from home, serve as indicators of consumer demand. These sectors have generally exhibited robust price increases in recent months. Analysts are divided on the outlook for hotel rates, particularly after the lodging away from home category saw a 3.2% surge in November, its fastest monthly growth in over two years. While some anticipate declines in December, others, like Pantheon Macroeconomics Chief US Economist Samuel Tombs, predict another significant increase, citing record holiday travel and rising average hotel room rates.
Furnishings and Core Goods
After substantial price drops in late 2023, the deflation rate for core goods (commodities excluding food, energy, and used vehicles) slowed in 2024. A 0.7% increase in household furnishings and supplies contributed to a 0.1% rise in core goods prices in November. Federal Reserve officials will likely scrutinize core goods for insights into the broader inflation trajectory, particularly considering potential impacts of incoming policy changes. Skanda Amarnath, executive director of Employ America, suggests that tariff uncertainties could lead to anticipatory price increases. A sustained rise in core goods prices could signal caution against further interest rate cuts.
Conclusion: CPI Report to Influence Fed’s Next Move
The December CPI report will be a crucial factor in the Federal Reserve’s decision-making process regarding interest rates. Continued strong inflationary pressure could solidify the case for an extended pause in rate cuts, while a weaker-than-expected report might open the door for further monetary easing. Investors and market participants will closely analyze the report’s details to gauge the direction of monetary policy and its implications for financial markets.
