The US Bureau of Labor Statistics has released its latest Consumer Price Index (CPI), reporting a 0.1 per cent decline (seasonally adjusted) in headline inflation over the month of December, contrasting a 0.1 per cent increase in November.
Inflation remains elevated in annualised terms, rising 6.5 per cent in the 12 months to 31 December.
The monthly CPI fall has been attributed to a sharp decline in energy commodity (gasoline and oil) prices, which dropped 9.4 per cent in December, adding to a 2 per cent dip in November.
This offset sharp monthly increases in the cost of energy services (1.5 per cent), housing (0.8 per cent), and food (0.5 per cent).
James Knightley, chief international economist at ING Research, said the US CPI figures confirm price pressures are easing despite a strong job market.
According to Mr Knightley, the Federal Reserve may consider reducing the size of future hikes to the funds rate in the wake of these latest inflation indicators.
“A 25 bp hike in February is likely, with a further 25 bp in March,” he said.
Mr Knightley is projecting the federal funds rate to peak at 5 per cent, followed by a more meaningful easing of inflationary pressures over the second quarter of 2022 and rate cuts in the second half of the year.
“…We are strongly of the view that with inflation slowing rapidly and recession looking inevitable, the second half will witness meaningful rate cuts, possibly as much as 100 bps,” he concluded.
If the Fed reverses its monetary policy strategy, the Reserve Bank of Australia (RBA) is expected to respond in kind, according to Robert Carnell, ING Economics’ regional head of research, APAC.
“This forecast derives from our assumptions of more slowdowns in GDP growth, further declines in consumer price inflation, worsening negative house price growth, and the discrete impacts of rate hikes on mortgage payments,” he said.
“Rates ending the year lower than their forecast peak will lessen the subsequent reset impact in early 2024 and sow the seeds for a broader recovery.”
Mr Carnell is projecting cumulative reductions of 50 basis points by the end of 2023, followed by additional cuts in the first quarter of 2024.
