Market frenzy! The U.S. December core CPI slightly lower than expected, interest rate cut expectations heat up

According to Zhitong Finance, the U.S. unadjusted CPI year-on-year rate rose to 2.9% in December, marking a rebound for the third consecutive month and reaching a new high since July 2024, in line with market expectations, with the previous value at 2.7%. The U.S. unadjusted core CPI year-on-year rate recorded 3.2% in December, the lowest since August 2024, with market expectations holding steady at 3.3%.

The food index rose by 0.3% in December after a 0.4% increase in November. In December, four out of six major grocery store food indices increased. The index for cereals and baked products rose by 1.2% in December after a 1.1% decline in November. In December, the index for meats, poultry, fish, and eggs increased by 0.6%, with the egg index rising by 3.2%. Other household food indices rose by 0.3% in December, while the dairy and related products index increased by 0.2%.

The energy price index rose by 2.6% in December after a 0.2% increase in November. The gasoline price index rose by 4.4% that month. (Before seasonal adjustment, gasoline prices fell by 1.1% in December.) The natural gas price index rose by 2.4%, and the electricity price index increased by 0.3%.

In December of last year, the growth rate of housing costs in the U.S. slowed, with an overall increase of 0.26%, the smallest increase in three months. The "owner's equivalent rent," which measures homeowners' costs, rose by 0.31%, accelerating from November but still much more moderate than most of the past few years. Another major component, rent, rebounded again compared to November, with an increase of 0.31%, up from 0.21% in November, but also weaker than what was seen during most of the inflation period post-COVID-19. Overall, there is currently some phenomenon of housing inflation retreating.

The healthcare price index rose by 0.1% in December after increases of 0.3% in October and November. The price index for physician services and hospital services rose by 0.1% and 0.2% in December, respectively. The airline ticket price index increased by 3.9% in December, following a 0.4% rise the previous month. The price index for used cars and trucks rose by 1.2%, while the new car price index increased by 0.5%.

Other indices that rose in December included automobile insurance, entertainment, clothing, and education items. In contrast, the personal care index fell by 0.2% in December, compared to a 0.4% increase in November. The price index for alcoholic beverages also saw a decline.

Notably, the Fed's preferred CPI measure—the super core or services CPI excluding housing—rose by 0.28% month-on-month (with the year-on-year inflation rate slowing to 4.17%).

After the release of the CPI data, investors are currently in a buying mode following an unexpected cooling of the core CPI year-on-year. Interest rate futures traders have increased bets on a rate cut by the Federal Reserve in June, with the likelihood of a second rate cut by the Fed in 2025 rising. The yield on the U.S. 2-year Treasury bond, sensitive to Fed policy rates, fell further after the inflation data was released, dropping 6.5 basis points to 4.299%. The U.S. Dollar Index (DXY) briefly fell more than 40 points, reporting at 108.74. Spot gold rose nearly $10 in the short term, currently reported at $2,691.09 per ounce. The price of Bitcoin surged nearly $2,000 after the report was released, rising over 2% in the past 24 hours, breaking the $90,000 mark. The three major U.S. stock index futures saw a significant short-term rise, all up over 1%.

Despite this, a strong economy, the threat of widespread tariffs on imported goods, and large-scale deportations of undocumented immigrants will still prompt the Fed to cut rates less aggressively this year. Additionally, Trump has promised tax cuts, which will stimulate the economy; consumer inflation expectations soared in January, with households concerned that tariffs will raise prices on goods.

Bloomberg analyst Chris Anstey stated that the CPI data is good news for the Fed, but given the strong momentum in the labor market, it is hard to see rate cuts coming back into focus. Most likely, it will take several months of further progress on inflation for the Fed to consider additional rate cuts.

Although economists expect smaller rate cuts this year, there is disagreement about whether the Fed will lower borrowing costs again before the second half of the year. Goldman Sachs expects two rate cuts this year, in June and December, down from a previous expectation of three cuts. Bank of America Securities believes the Fed's easing cycle has ended.

Peter Cardillo, Chief Market Economist at Spartan Capital Securities, also stated: "The overall CPI in the U.S. is disappointing. But this may be due to food prices. The cooling of the core CPI year-on-year is good news. Regarding the December CPI report, I do not believe this will change the inflation outlook, nor do I think it will change the Fed's cautious stance. From the current situation, the dollar is weakening, yields are declining, and the market may be focusing on core inflation. However, this report really does not show much change. The most important thing is that inflation remains sticky."