US December inflation bounces to 2.9% but core inflation eases

17 Jan 2025 , 10:34 AM

US INFLATION – FIRST THE BAD NEWS AND THEN THE GOOD NEWS

The October 2024 consumer (CPI) inflation announced by the US Bureau of Labour Statistics (BLS) on January 15, 2025 surged sharply to 2.9%. The consumer inflation has been on a steady uptrend. Combine that with the fact that the December US unemployment also came in lower at 4.1% with 2,56,000 payroll additions. That indicates that while last mile inflation continues to be a problem, the risks of a hard landing are now almost out of the way. That would be a fit case for the Fed to pause on rates.  However, there are also some good tidings in the sense that core inflation (excluding food and fuel) has actually tapered from an average of 3.4% in the last 6 months to 3.2% in December 2024. This has raised the hopes that the Fed may persist with its rate cuts in January 2025 also.

FOOD AND ENERGY TRIGGER BOUNCE IN US DECEMBER INFLATION

A spike in food inflation and energy inflation; amidst tapering core inflation led to the headline US inflation for December 2024 touching 2.9%; up 50 bps in last 3 months.

Inflation Basket Category	Dec 2024 (YOY)	Inflation Basket Category	Dec 2024 (YOY)
Food Inflation	2.50%	Core Inflation	3.20%
Food at home	1.80%	Commodities less food and energy	-0.50%
·         Cereals and bakery products	0.80%	·         Apparel	1.20%
·         Meats, poultry, fish, and eggs	4.20%	·         New vehicles	-0.40%
·         Dairy and related products	1.30%	·         Used cars and trucks	-3.30%
·         Fruits and vegetables	1.00%	·         Medical care commodities	0.50%
·         Non-alcoholic beverages	2.30%	·         Alcoholic beverages	1.40%
·         Other food at home	0.80%	·         Tobacco and smoking products	6.70%
Food away from home	3.60%	Services less energy services	4.40%
·         Full service meals and snacks	3.60%	Shelter	4.60%
·         Limited service meals	3.70%	·         Rent of primary residence	4.30%
Energy Inflation	-0.50%	·         Owners’ equivalent rent	4.80%
Energy commodities	-3.90%	Medical Care Services	3.40%
·         Fuel oil	-13.10%	·         Physician Services	2.60%
·         Gasoline (all types)	-3.40%	·         Hospital Services	3.50%
Energy services	3.30%	Transport Services	7.30%
·         Electricity	2.80%	·         Motor vehicle Maintenance	6.20%
·         Natural gas (piped)	4.90%	·         Motor vehicle insurance	11.30%
Headline Consumer Inflation	2.90%	·         Airline Fare	7.90%

Data Source: US Bureau of Labour Statistics

In the US, the CPI inflation acts as a lead indicator for PCE inflation, which sets the tone for Fed rate action. Here are key takeaways from the data.

• Food inflation in December 2024 has spiked to 2.5%, sharply higher than the average of the last 6 months. Four of the six major grocery groups spiked with maximum pressure coming from cereals, bakery products, meat, poultry, eggs, and dairy products.
• Energy inflation at -0.5% is almost in neutral zone. The price of gasoline have gone up as have the prices of natural gas increased 4.4% and 2.4% respectively in December 2024.
• How did core inflation taper to 3.2%? The easing of core inflation essentially came from rental costs and medical costs in December 2024.

While it is a concern that headline CPI inflation in the US is up 20 bps to 2.9%, the policy makes will take solace from the core inflation tapering.

DECEMBER 2024 MOM INFLATION SPIKES TOO

Here is the month-on-month (MOM) inflation for last 6 months.

Month	Food (MOM)	Energy (MOM)	Core (MOM)	Headline (MOM)
Jul 2024	0.2%	0.0%	0.2%	0.2%
Aug 2024	0.1%	(0.8%)	0.3%	0.2%
Sep 2024	0.4%	(1.9%)	0.3%	0.2%
Oct 2024	0.2%	0.0%	0.3%	0.2%
Nov 2024	0.4%	0.2%	0.3%	0.3%
Dec 2024	0.3%	2.6%	0.2%	0.4%

Data Source: US BLS (negative figures in brackets)

The headline MOM inflation has spiked in the last 2 months from 0.2% to 0.4%; and is a clear upward shift, compared to the trend of last 6 months.

1. MOM food inflation in December 2024 was up 0.3%; compared to 0.4% in November. Much of the easing in food inflation in the latest month came from the grocery basket.
2. The MOM Energy inflation has spiked from 0.2% to 2.6% in December 2024. With the US tightening sanctions on Russia, the impact is being felt in high frequency inflation.
3. The MOM Core inflation tapered to 0.2% in December 2024 giving the first indication of tapering core inflation. Rentals and medical services are seeing a fall in prices.

Overall, the high frequency MOM inflation captured the essential story of December 2024; with core inflation offsetting the surge in food and fuel inflation.

CME FEDWATCH OPTIMISM ON RATE CUTS WANING

Here is how the CME Fedwatch probabilities look like post the CPI inflation.

Fed Meet	275-300	300-325	325-350	350-375	375-400	400-425	425-450
Jan-25	Nil	Nil	Nil	Nil	Nil	2.7%	97.3%
Mar-25	Nil	Nil	Nil	Nil	0.7%	27.3%	72.0%
May-25	Nil	Nil	Nil	0.2%	6.9%	37.7%	55.2%
Jun-25	Nil	Nil	0.1%	2.5%	17.4%	43.7%	36.3%
Jul-25	Nil	Nil	0.4%	4.6%	21.2%	42.6%	31.1%
Sep-25	Nil	0.1%	1.4%	8.5%	26.2%	40.0%	23.9%
Oct-25	Nil	0.3%	2.3%	10.8%	28.0%	37.9%	20.8%
Dec-25	Nil	0.5%	3.4%	13.0%	29.3%	35.6%	18.0%

Data source: CME Fedwatch (# – lower probabilities consolidated)

As of December 2024, the Fed has cut rates by 100 bps to the range of 4.25% to 4.50%. Here are the expectations for the July 2025 and December 2025 milestones.

• Let us look at Fedwatch probabilities for June 2025. The CME Fedwatch is assigning 36.3% probability for no action till June; 65.7% probability for 1 rate cut by June 2025 and just 20% probability for 2 rate cuts of 25 bps by June 2025.
• What about the milestone of December 2025. The CME Fedwatch is assigning 18.0% probability for no action till December 2025; 82.0% probability for 1 rate cut by December 2025 and just 46.4% probability for 2 rate cuts of 25 bps by December 2025.

The most likely scenario is just one rate cut in 2025 and an outside chance of 2 rate cuts by December 2025 if data is supportive. Anything beyond that looks highly unlikely for now!