The December Consumer Price Index, or CPI, which measures U.S. inflation, rose 0.3% month over month. to 3.4%. This is up from a November reading of 3.1% and higher than the 0.2% month-over-month increase and 3.2% annual reading economist’s were expecting.
Housing costs were responsible for more than half of the increase in prices followed by energy (electricity and gasoline), along with food prices. Excluding the more volatile food and energy costs, the so-called core prices increased just 0.3% month over month but fell to an annual rate of 3.9%. That represents the slowest pace since May 2021 and down from 4.0% in November.
The producer price index (PPI), which measures inflation at the wholesale level, decreased 0.1% for the third straight month, which is the longest streak since 2020. It’s also lower than the 0.2% increase economists were expecting.
While inflationary data came in hotter than expected, inflation is expected to cool in the coming months. On top of that, softer than expected U.S. producer prices mean the U.S. central bank is still expected to announce its first interest rate cut in the first half of the year.
How Will Inflation Affect Interest Rate Cuts?
The U.S. Federal Reserve, and other global central banks, including the Bank of Canada, introduced an aggressive interest rate hike cycle to bring pandemic-related inflation under control. Between March 2022 and July 2023, the Federal Reserve declared 11 rate hikes, taking interest rates from near zero to a range of 5.25% to 5.5%.
Inflation has come down drastically since the rate hikes were introduced, from a 40-year high of 9.1% in June 2023, to 3.2% today. The Federal Reserve has an inflation target of 2%; it’s not there yet, but the Fed sees core inflation falling to 2.4% in 2024, 2.2% in 2025, and 2.0% in 2026.
Following the December 2023 inflation data, traders’ expectations for a 25-basis point (0.25%) rate cut in March jumped to approximately 74% from 66.3%. That would take the U.S. interest rate down to a range of 5.0% to 5.25%.
Traders are also pricing in a 44% chance of the Bank of Canada making the same quarter point interest rate cut in March, rising to 88% odds in April. This would take the Bank of Canada’s interest rate down to 4.75%.
Following the CPI and PPI announcement, the S&P 500 has closed to within one percent of its all-time high of 4818.62 with the TSX is trading at a 20-month high.
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U.S. inflation is still above the U.S. Federal Reserve’s 2% target but is expected to cool even further over the coming months. As a result, the U.S. and Canadian central banks are expected to introduce their first interest rate cuts for this cycle in March. How will this impact Canadian and U.S. stocks? Ask the trading professionals at Learn-To-Trade.com.
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