U.S. consumer prices showed no signs of slowing in December amid rising energy costs, but the Federal Reserve’s preferred inflation gauge fell, leading to a rally on Wall Street.
The consumer price index rose 0.4% last month after climbing 0.3% in November, the Labor Department’s Bureau of Labor Statistics said Wednesday. In the 12 months to December, the CPI rose 2.9% after rising 2.7% in November.
Economists polled by Reuters forecast an increase of 0.3% and 2.9% year-on-year.
However, core CPI – which excludes food and energy and is more crucial to Fed policymakers – came in at 3.2%, down a notch from the previous month and slightly better than the 3.3% forecast.
The better-than-expected data sent the Dow Jones Industrial Average up more than 700 points, or 1.7%, as investors regained confidence that the Fed will cut rates several times this year.
In recent trading, federal funds futures showed the odds of more than one decline stood at 46%, up from 35% on Tuesday, according to CME Group data.
Fed officials expressed cautious optimism about the inflation outlook, citing continued signs of easing price pressures.
“The December CPI report continues the story we’ve been talking about, which is that inflation is moving closer to its target,” said Richmond Fed President Thomas Barkin.
Meanwhile, New York Fed President John Williams said “the process of disinflation remains ongoing.”
No rate cuts are expected at the Fed’s Jan. 28-29 policy meeting.
Goldman Sachs expects two rate cuts this year, in June and December, a figure revised downwards instead of three.
The central bank launched its easing cycle in September and cut its benchmark overnight interest rate by 100 basis points to the current range of 4.25% to 4.50%.
The last cut came in December, when policymakers also predicted two rate cuts this year instead of the four they had predicted in September. The key rate was increased by 5.25 percentage points between March 2022 and July 2023.
Progress in bringing inflation back to the central bank’s 2% target hit a snag in the second half of last year.
According to the Bureau of Labor Statistics, prices for rent, airline tickets, new and used cars and trucks, medical care and auto insurance increased in December.
Energy appears to be the main driver of the overall increase, contributing more than 40% to the monthly increase for all products. The gasoline index jumped 4.4% for the month.
Inflation eased in categories such as personal care, communication and alcoholic beverages, whose prices fell during the month.
“The argument about the weakening economy seems to be fading,” Barkin said.
A sharp increase in hiring in December, with more than 250,000 new jobs and a drop in unemployment to 4.1%, further supports the Fed’s pause.
“You continue to see good numbers on retail sales, unemployment, etc.…Demand, you hear, is good, solid, good. »
With post wires
