MNI US Inflation Insight: Almost Normal

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EXECUTIVE SUMMARY

• December’s CPI data was softer than expected in most respects, with relatively limited “payback” from the unusually soft (and heavily distorted) October/November report.
• Stronger-than-expected food prices and energy readings kept headline (0.31% M/M) from "missing" more vs MNI's unrounded consensus (0.37% M/M) than did core which came in at 0.24% M/M (0.35% unrounded consensus).
• Headline Y/Y inflation printed its lowest since June and core CPI Y/Y inflation at joint lows since early 2021. There was relatively little change in Y/Ys for core goods and services compared to last month's surprisingly low November print, though food inflation firmed.
• Within the core categories, the big surprise was that there was zero inflation in core goods prices despite anticipation that there would be "payback" in particular for unusually low holiday sales-related goods prices in November (along with continued expectations of tariff passthrough).
• Core services and overall supercore were also on the soft side though directionally most of the major categories were in order. That included a pickup in housing inflation that was slightly more than had been expected, and while travel-related services jumped as fully anticipated, they wasn't quite as strong as consensus had thought.
• Subsequently-released (and delayed) producer price data for October and November pushed up core PCE forecasts for Q4 – and there will be a positive spread for core PCE over its CPI counterpart - but the FOMC’s December projection of 3.0% Y/Y still looks to have downside risks.
• There were plenty of oddities in this CPI report, with several categories registering multi-year/all-time highs and others lows without much explanation, reinforcing the notion that the “noise” from the October/November collection period continues to reverberate.
• By the same token, it will reinforce conviction among FOMC participants that it could be a little longer before there is a cleaner read on underlying inflation dynamics.
• Overall while inflation may not have picked up as strongly toward the end of the year as feared following the imposition of tariffs, Fed officials have signalled that they will be waiting to see data early in the New Year for any signs that businesses are finally setting prices higher to offset input inflation pressure. But most are cautiously optimistic that inflation should come down over the course of the year.
• In the meantime, the data did nothing to alter expectations for a January Fed hold, with more focus at this point on the labor market. FOMC meeting-dated OIS shows just under 1bp of easing for this month, 6.5bp through March, 11bp through April, 24bp through June, 32bp through July and 53bp through year-end.