Headline inflation rose by 0.3 per cent in the US in December, just above the consensus estimate of a 0.2 per cent gain. Inflation was higher 3.4 per cent on the year, above the 3.2 per cent expected by analysts.
Core inflation, which strips out the volatile food and energy components, slowed to 3.9 per cent in December, from 4 per cent the prior month.
While headline inflation slightly exceeded expectations, analysts at Commonwealth Bank believe that Federal Reserve cuts will commence in March.
“Overall, the slight overshoot on CPI shows the return of inflation to target may be bumpy but the prevailing view of Fed cuts beginning in March remains in place,” CBA said.
The US Federal Reserve left interest rates on hold at its final meeting of the year on 13 December, setting the stage for rate cuts this year both overseas and in Australia.
Namely, the Fed’s decision to keep its benchmark rate at 5.25 to 5.5 per cent marked its third consecutive hold and followed further cooling in the US consumer price index (CPI) to 3.1 per cent in November, down from a peak of 9.1 per cent in June 2022.
“Inflation has eased from its highs, and this has come without a significant increase in unemployment. That is very good news,” Fed chairman Jerome Powell said at the time.
“But inflation is still too high, ongoing progress in bringing it down is not assured, and the path forward is uncertain,” he added.
‘Slow and incremental’ progress
According to Nigel Green from deVere Group, the recent US CPI data implies that progress on inflation is currently slow and incremental.
“We believe that there’s still not enough evidence for the central bank to start cutting rates,” said Mr Green.
“With inflation remaining sticky, we expect rates will be higher for longer. We don’t see a policy pivot in sight.”
He suggested that markets have been pricing-in rate cuts too quickly.
“There’s a reality chasm between what the Fed has signalling regarding rate cuts and what the markets are expecting,” Mr Green said.
“Certainly, some stock surges – such as those which are AI-orientated – are reasonable. Yet many others have been getting ahead of themselves.”
Following the release of inflation data, US sharemarkets were mixed suggesting the report dampened hopes of early interest rate cuts.
In response to the news of higher-than-expected inflation, Federal Reserve Bank of Cleveland president Loretta Mester remarked that March is likely too early to consider lowering interest rates.
Nonetheless, Bank of America is still anticipating a quarter-point rate cut in March.
“Until we see further progress on services inflation, the Fed will likely be worried about upside risks to inflation. That said, the overall progress towards the 2 per cent target is undeniably encouraging and should allow the Fed to begin easing policy rates,” Bank of America said.
Morgan Stanley, on the other hand, believes the Fed will start easing monetary policy in June.
Australia on track for rate cuts
In Australia, AMP’s chief economist, Shane Oliver, expects the first rate cut in June with the cash rate falling to 3.6 per cent by year end.
According to Dr Oliver, local data suggests that inflation is falling faster than expected.
Namely, according to the latest monthly consumer price index indicator released by the Australian Bureau of Statistics (ABS), inflation rose by 4.3 per cent in the 12 months to November, down from the 4.9 per cent rise in October.
AMP now expects the December monthly inflation indicator to show inflation falling to 3.3 per cent year-on-year (YoY), bringing Australian inflation down to near the levels currently being seen in the US and Europe.
“Much has been said about higher Australian inflation data relative to our global peers. However, Australian inflation peaked three to six months after our major peers, so it’s only natural that the decline in inflation is also occurring later than our peers – and in fact, it is still following the same trajectory,” said Dr Oliver.
Commenting on the US data on Friday, Dr Oliver told InvestorDaily that he still expects the Fed to start cutting in June.
“I don’t think it changes anything much, really,” Dr Oliver said. “Yes, the headline CPI was a bit higher than expected owing to higher energy and food prices but core inflation was pretty much in line with expectations.”
“So the Fed is still likely to leave rates on hold this month, will likely push back against market expectations for a March cut but still looks on track to start cutting in the June quarter.”
While noting that “sticky services inflation in the US may be a factor keeping the RBA cautious”, Dr Oliver added that AMP remains of the view that the cash rate has peaked and will start falling from midyear.
