Consumer Price Index increased 3.4% in December vs. 3.2% expected

Inflation in the US, as measured by the change in the Consumer Price Index (CPI), rose to 3.4% on a yearly basis in December, the US Bureau of Labor Statistics (BLS) reported on Thursday. This reading followed the 3.1% increase recorded in November and came in stronger than the market expectation of 3.2%. On a monthly basis, the CPI rose 0.3%, compared to analysts’ forecast of 0.2%.

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The Core CPI, which excludes volatile food and energy prices, rose 0.3% on a monthly basis as anticipated. The annual Core CPI increased 3.9% in this period, down from 4% in November.

“The index for shelter continued to rise in December, contributing over half of the monthly all items increase,” the BLS noted in its press release. “The energy index rose 0.4% over the month as increases in the electricity index and the gasoline index more than offset a decrease in the natural gas index. The food index increased 0.2% in December, as it did in November. The index for food at home increased 0.1% over the month and the index for food away from home rose 0.3%.”

Market reaction to US Consumer Price Index data

The US Dollar gathered strength against its rivals with the immediate reaction to inflation figures. At the time of press, the US Dollar Index was up 0.05% on the day at 102.40.

US Dollar price today

The table below shows the percentage change of US Dollar (USD) against listed major currencies today. US Dollar was the strongest against the Australian Dollar.

	USD	EUR	GBP	CAD	AUD	JPY	NZD	CHF
USD		0.04%	0.03%	0.02%	0.16%	-0.02%	-0.02%	0.12%
EUR	-0.07%		-0.04%	-0.05%	0.12%	-0.09%	-0.10%	0.06%
GBP	-0.04%	0.06%		0.03%	0.18%	0.00%	-0.02%	0.14%
CAD	-0.02%	0.02%	-0.03%		0.14%	-0.04%	-0.03%	0.11%
AUD	-0.20%	-0.14%	-0.15%	-0.17%		-0.20%	-0.22%	-0.05%
JPY	-0.04%	0.00%	-0.01%	-0.04%	0.11%		-0.08%	0.08%
NZD	-0.02%	0.05%	0.02%	-0.01%	0.14%	-0.04%		0.13%
CHF	-0.16%	-0.12%	-0.13%	-0.14%	0.00%	-0.18%	-0.18%

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).

Economic Indicator

United States Consumer Price Index (YoY)

Inflationary or deflationary tendencies are measured by periodically summing the prices of a basket of representative goods and services and presenting the data as The Consumer Price Index (CPI). CPI data is compiled on a monthly basis and released by the US Department of Labor Statistics. The YoY reading compares the prices of goods in the reference month to the same month a year earlier.The CPI is a key indicator to measure inflation and changes in purchasing trends. Generally speaking, a high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish.

What to expect in the next CPI data report?

The US Consumer Price Index is forecast to rise at an annual pace of 3.2% in December, a tad quicker than the 3.1% increase reported in November. The Core CPI inflation, which excludes volatile food and energy prices, is set to fall to 3.8% in the same period, compared with the previous growth of 4.0%.

The monthly CPI and the Core CPI are seen increasing 0.2% and 0.3%, respectively.

In November, the US CPI numbers came in line with the market expectations, but the details of the report showed an uptick in the shelter index and used car and trucks index, which helped push back against the market’s pricing of Fed rate cuts next year.

Used car prices dropped 0.5% in December, dragging the Manheim Used Vehicle Index down 7.0% year-over-year (YoY), the monthly market report published by the auction house Manheim showed Tuesday.

Previewing the US December inflation report, “our forecasts for the December CPI report suggest core inflation slowed notably: we are projecting a “strong” 0.1% increase, notably down from 0.3% m/m in the last report,” said TD Securities analysts.

“Despite that, we look for strengthening in the headline to 0.2% m/m, as inflation won’t be aided by falling energy prices this time around. In the details, the report is likely to show that the goods segment remained an important drag on core inflation, while the shelter components are expected to remain sticky,” the analysts added.

Meanwhile, the Prices Paid Index of the ISM Services PMI survey edged slightly lower to 57.4 in December from 58.3 a month earlier. The Prices Paid Index of the Manufacturing PMI dropped to 45.2 in December from 49.9 in November. These readings portrayed the continued softening of price pressures in the services sector, and signaled sharper price declines in the manufacturing industry.

As Fed officials maintained their data-dependent stance on monetary policy, the US CPI inflation data holds the key to gauging the timing and the pace of the Fed rate cuts, which could significantly influence the value of the US Dollar. The details of the report could also highlight the sticky parts of inflation.

Heading into the US CPI showdown, the CME Group FedWatch Tool shows that markets are pricing in a 66% probability of the Fed announcing rate cuts as early as March. “The Bloomberg’s World Interest Rate Probability (WIRP) function suggests 5% odds of a cut on January 31 and rising to nearly 75% for the March 20 meeting after being nearly priced in at the start of last week. Five rate cuts are priced in vs. six at the start of last week, though there are still 50% odds of a sixth cut,” analysts at BBH noted.

How could the US Consumer Price Index report affect EUR/USD?

Although the annual CPI and Core CPI figures are widely cited by the media, the monthly inflation data, especially the Core CPI, is likely to stir markets.

A monthly core inflation reading of 0.3% or higher could prompt investors to dial down their bets on March Fed rate cuts, offering a fresh boost to the US Dollar. On the other hand, a softer-than-expected Core CPI print could trigger a broad USD sell-off, as it would reverberate Fed rate cut expectations in the first quarter of 2024.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for EUR/USD and explains: “The pair is consolidating Friday’s volatile trading action at around the 1.0900 level heading into the inflation data release on Thursday. The 14-day Relative Strength Index (RSI) indicator is trading listlessly at the midline, suggesting a lack of clear directional bias at the time of writing.”

On the upside, stiff resistance aligns at the 21-day Simple Moving Average (SMA) at 1.0975, above which the EUR/USD pair needs to find acceptance at the 1.1000 round level. The next relevant topside barrier is seen at the January 2 high of 1.1046.

Alternatively, a sustained move below the 50-day SMA of 1.0885 will threaten the horizontal 200-day SMA at 1.0847. A test of the 100-day SMA at 1.0764 cannot be ruled out if the above healthy support levels give way.”

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

Source: https://www.fxstreet.com/news/us-cpi-data-preview-inflation-set-to-accelerate-slightly-to-32-in-december-core-to-fall-further-202401110300