The recent economic reports from the United States indicate a notable shift in inflation dynamics, reflecting various factors that influence consumer prices and overall economic healthIn December, the core prices for goods slowed considerably, showing a mere 0.1% increase compared to the 0.3% rise observed in the previous monthThis particular slowdown in core goods pricing includes key categories such as furniture and household items, which experienced a decrease of 0.2% after a previous increase of 0.7%. Such fluctuations may be attributed to the ephemeral nature of holiday sales, suggesting that these price changes may not be sustainable in the long run.

Adding to these complexities, the aftermath of the recent hurricanes has played a role in moderating the effects on the automotive marketPrices for both new and used cars showed moderate increases of 0.5% and 1.2%, respectively, down from more pronounced rises of 0.6% and 2% in prior months

Advertisements

The weakening impact of these hurricanes, along with a drop in prices for personal care products, has combined to exert downward pressure on inflation ratesImportantly, it is worth noting that used car prices have less weight in the Personal Consumption Expenditures (PCE) index than in the Consumer Price Index (CPI), a factor that the Federal Reserve is more focused onThis aspect suggests that the effects of these changes on overall PCE inflation may be somewhat limited, particularly against the backdrop of a significant decline in the prices of electrical appliances, which could provide a counterbalancing effect.

According to the Cleveland Federal Reserve's projections, the core PCE for December is anticipated to show a month-over-month increase of 0.2% and a year-over-year increase of 2.8%, relatively stable compared to previous readingsCore inflation, which excludes housing-related costs, reflected a marked retreat in December, showing only a 0.2% increase month-over-month, a decrease from 0.3% the month before, while the year-over-year metric dipped from 4.3% to 4.1%. A significant contributor to these changes is the healthcare sector, where prices fell by 0.2%, alongside financial services, which saw a more considerable drop of 2.1%.

Car insurance prices experienced a slight rebound, increasing by 0.4%, yet they remain significantly below the average of 1.3% noted in the first half of 2024. Looking forward, challenges related to employment in the healthcare industry—stemming from a mismatch in supply and demand—are expected to limit further declines in healthcare pricing

Advertisements

Additionally, strong stock market returns could maintain pressure on financial services costs, suggesting that these price categories might remain sticky.

When investigating the housing sector, which carries substantial weight and tends to exhibit stickiness in price changes, December saw a steady month-over-month increase of 0.3% in housing pricesFor instance, owner’s equivalent rent rose to 0.3% from 0.2%, indicating a slight recoveryHowever, both one-bedroom and multi-bedroom rental prices have maintained lower levels, which helps suppress the overall price index for owned residences (OER). As a leading indicator, new lease prices have finally returned to pre-pandemic levels, yet volatility is anticipated to persist in this sector going forward, with expectations that month-over-month changes may hover around the 0.3%-0.4% range.

Overall, the core CPI has been on a downward trajectory throughout 2024, beginning the year at 3.9% and reducing to 3.2% by December

Advertisements

This figure equals the low benchmark established in July and suggests a continuation of this trend into the early months of 2025, tempered by several factors: core goods prices are expected to fluctuate around lower levels, housing prices are unlikely to witness significant rebounds, and wage growth continues to decelerateWhile a slight uptick in core inflation is anticipated as we transition into January due to seasonal effects, the overarching trend remains one of gradual decline.

The easing of inflation rates has positively influenced financial markets, thereby boosting confidence in potential interest rate cuts by the Federal ReserveFedWatch data indicates that there is a 97.3% probability the Fed will not cut rates in January, with the likelihood maintaining at 71% for March—down slightly from previous estimatesTraders have begun to anticipate a 53.8% chance of a rate cut by May, an increase from earlier forecasts

• Rapid Decline of Risk-Free Interest Rates
• Policies to Reverse Low Prices
• Is Capital Flowing Back to Dividend Assets?
• U.S. CPI Approaches Short-Term Turning Point
• Insurers Boost Real Estate Holdings

Consequently, the yield on 10-year Treasury bonds fell by 13 basis points to 4.65%, while the U.Sdollar index dipped to 109.09. The alleviation of inflation pressure has further resulted in improved liquidity in the U.Sstock market, as evidenced by gains across all major indices such as a 2.45% increase in the Nasdaq and 1.83% in the S&P 500.

The Consumer Price Index (CPI) for December highlighted a slight increase, as energy prices surged, reflecting a year-over-year rise of 2.9%. This reading aligns with market expectations but exceeds previous valuesCore CPI, which excludes volatile categories like food and energy, advanced by only 0.2%, a reduction from projected and earlier levelsInflationary trends evidenced a considerable array of data across various timeframes, with annualized returns for three-month and six-month headline CPI reflecting a decrease from previous times.

Prices for food showed a modest increase of 0.3% month-over-month, similar to prior values, while energy prices rose significantly, up 2.6% reflecting the resurgence of crude oil prices