In a turn of events that has left economists and market watchers on the edge of their seats, the U.S. government’s latest revisions have revealed that inflation in December was even less than initially reported.
The Consumer Price Index (CPI), a critical measure indicating the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services, saw a mere 0.2% increase on the month, dropping from the previously reported 0.3%. This revelation, courtesy of the Labor Department’s Bureau of Labor Statistics, is not just a number—it’s a beacon of hope signaling that inflation is on a moderating trajectory as we bid adieu to 2023.
This modest yet significant adjustment could potentially be the game-changer in the Federal Reserve’s strategy, offering it more room to maneuver with interest rate cuts later this year. The adjustment comes amid heightened scrutiny, especially after last year’s revisions painted a picture of rising inflation in 2022, sending Treasury yields on an upward spiral and investors into a tizzy over the possibility of a tighter monetary policy.
Fed Governor Christopher Waller’s spotlight on last year’s revisions had the markets on tenterhooks, eagerly anticipating the impact of the latest figures. And while the core CPI, excluding food and energy, held steady at a 0.3% increase, mirroring the original report, the overarching message is clear: inflation’s grip is loosening.
The narrative doesn’t end there; November’s headline reading also saw a revision, ticking up to a 0.2% increase from the initial 0.1%. When the dust settled, headline CPI’s annualized rate in the fourth quarter decelerated to 2.7%, a slight dip from previously stated figures. This, coupled with second-half revisions that nudged the CPI higher by a mere 0.003 percentage point, paints a picture of an inflation trend that’s gently easing off the accelerator.
Market analysts and economists, who might have anticipated a more dramatic revelation, have likened the revisions to “a damp squib.” Yet, this subtle shift could very well tilt the scales in favor of an earlier interest rate cut by the Fed, possibly as soon as May. This perspective gains weight considering some Fed officials’ apprehensions about a repeat of last year’s upward revision scare.
The broader implications for the Federal Reserve, which leans on the personal consumption expenditures price index as its inflation yardstick, are profound. The CPI’s insights feed into the Commerce Department’s PCE calculation, offering a nuanced view of inflationary trends and consumer behavior adjustments in response to fluctuating prices.
As the dust settles on this latest data release, the futures market remains stoic, with traders largely anticipating the Fed to maintain its benchmark overnight borrowing rate in March, followed by a series of cuts throughout the year. This development could mark a pivotal moment in the economic narrative of 2024, potentially heralding a new chapter of growth and stability. Stay tuned as we continue to navigate these turbulent financial waters, armed with the latest data and insights.
