US Inflation Rises But Core Inflation Drops - 16 January 2025

US CPI Climbs to 2.9%

The US December inflation report presented a mixed picture, as headline inflation rose while core CPI recorded a slight drop. The consumer price index (CPI) rose in December to 2.9% year-on-year, up from 2.7% in November and matching the market estimate of 2.9%. This marked a third straight increase in headline inflation. Monthly, CPI rose by 0.4%, up from 0.3% in November and above the market estimate of 0.3%. The rise in inflation was largely driven by a jump in energy and food prices.

The core CPI rate, which excludes volatile items and is a better gauge of inflation trends, eased slightly to 3.2% after hovering at 3.3% for the past three months. Monthly, core CPI ticked lower to 0.3% in December from 0.2% a month earlier and was higher than the market estimate of 0.3%.

The key takeaway from the December inflation report was the decline in core CPI, which is what Fed policy makers will be monitoring at as they chart a rate path for the next several months. Although the drop in core CPI small, it was a move in the right direction towards the Fed’s target of 2%.

The money markets have responded by raising the probability of a quarter-point cut in March to 27%, up from 19% prior to the inflation release, according to CME's FedWatch. The Fed is virtually certain to hold rates at the next meeting on Jan. 29. The Fed has indicated that it plans to lower rates only twice in 2025 but if inflation fall more quickly than expected or the labor market shows signs of rapid deterioration, the Fed would likely respond with additional (or larger) rate cuts.

US Dollar Lower, Stock Market Soars

The US dollar posted losses against most of the major currencies after Wednesday’s inflation report, as rate cut expectations increased due to the decline in core CPI. The biggest winner on the day was the Japanese yen, as the USD/JPY currency pair declined by approximately 1% on Wednesday. The sharp jump by the Yen was driven by the US inflation report as well as comments from the Bank of Japan about a possible rate hike.

The US stock market responded to the inflation report with strong gains, as investors gave a thumbs-up to the rise in expectations of a March rate cut.

The S&P 500 surged higher with a gain of 107 points (1.83%) and closed at 5949.91.

The Nasdaq 100 shot up 480.44 points (2.3%) and closed at 23,237.85.

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