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Inflation Tops Expectations, Bets on Fed Easing Slip

Underlying US consumer inflation failed to soften as much as expected last month, reducing odds on rate cuts at the Federal Reserve’s March meeting and beyond

According to data published by the Bureau of Labor Statistics this morning, the core consumer price index – with highly-volatile food and energy prices excluded – rose 3.9 percent in December from the same period last year, up 0.3 percent on a month-over-month basis. This slightly exceeded consensus estimates among economists polled by the major data providers ahead of the release, which were set closer to the 3.8-percent mark.

On a headline all-items basis, prices rose 0.3 percent on a month-over-month basis in December, up 3.4 percent over the previous year, and the fastest in three months. Americans paid 0.4 percent more for energy on a month-over-month basis, with higher gasoline prices partially unwinding November’s -2.3 drop and surprising most economists, while the shelter sub-index climbed 0.4 percent after rising 0.4 percent in November. Food prices rose 0.2 percent in December, holding steady with the pace set in the prior month.

According to our estimates, the so-called “supercore” measure—which captures core services minus housing—decelerated to 3.9 percent year-over-year, and suggesting that fundamental price drivers are still fading.

Short-term Treasury yields are rising as investors cut expectations for rate cuts from the Federal Reserve, and the dollar is bouncing back from this morning’s losses. Equity futures are dropping.

Bottom line: We still believe that markets are overestimating the Fed’s willingness to cut rates this year, but today’s numbers don’t present a compelling case for a reversal in that dynamic. The data will generate short-term lift for the greenback and interest rates, but should ultimately leave markets broadly convinced that disinflationary forces have gained virtually-unstoppable momentum. The dollar should come under renewed pressure in the coming days as investors are pushed out across the risk/reward curve, and the ongoing effort to top-tick Treasury yields is likely to resume.

Contributions to monthly headline inflation, percentage points

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