- Core CPI has settled into a pattern of overly hot readings
- Core services inflation remains hot, core goods disinflation waned
- Little but volatile market reaction
- Key is how this may translate into the Fed’s preferred inflation gauge
- US headline/core CPI m/m %, SA, December:
- Actual: 0.3 / 0.3
- Scotia: 0.3 / 0.3
- Consensus: 0.2 / 0.3
- Prior: 0.1 / 0.3
US core CPI confirmed expectations that underlying inflationary pressures in the US economy remain too hot for the Fed’s liking which leans against market pricing for a cut as soon as the March meeting. The underlying details (here) reinforced this takeaway and I’ll point out what met expectations and where there were surprises. The USD is slightly firmer post-release. Yields were marginally affected albeit volatile thus far. Stocks are flat.
Core inflation (ex-food and energy) landed at 0.31% m/m SA with headline CPI up by 0.3% m/m SA. Both readings met my expectations while core met consensus, but headline was a tick firmer than consensus.
Headline and core CPI matched one another because gasoline and food did not offer material weighted contributions which was in line with what I had estimated. Food was up by just 0.2% m/m and so the 13.4% basket weight translated into no contribution. Gas was up by 0.2% m/m SA and so the 3.2% basket weight translated into zero weighted contribution as expected.
Have a look at the pattern of late when m/m core readings are annualized in chart 1. The latest December reading of 3.4% follows the 3.9% print in November. The 2.8% estimate for October was the lightest reading in the past five months as the prior two months settled in at 3.5% and 3.8%.
In other words, the trend continues to point to readings that are too hot for the Fed’s liking by way of the data dependency part of how they formulate policy. Expectations are the other part, but Chair Powell will remain skeptical toward what Fed models are predicting given the disastrous performance of inflation models throughout the pandemic and his comments on their track record. Powell will retain a show-me-the-proof bias and until he gets convincing evidence that underlying inflation is settling in toward 2%. Until he sees such evidence that that it is staying there I just don’t think he’s going to seriously entertain cutting along the market’s timeline.
Core goods CPI (ex-food and energy) was flat at 0% m/m SA which is the first non-negative reading in four months as shown in chart 2. I think core goods disinflation is waning but was a little surprised to see it in this report. This is part of what drove the firm overall core CPI reading. It’s just one month, but the evidence tentatively leans toward viewing core goods disinflation as maturing. More data is clearly needed.
Core services CPI ex-housing and ex-energy was up 0.4% m/m for the second consecutive month which was in the realm of what was expected. Given the pattern to date, this portrays the deceleration to 0.2% in October as the aberration (chart 3).
Across other details, housing was a significant contributor once more. Owners’ equivalent rent was up 0.5% m/m which continues to be hot. Rent of primary residence was up another 0.4% m/m SA and is also hot.
New vehicle prices were up by 0.3% m/m SA which was in the ballpark of industry guidance, but I’m a bit surprised by used vehicles relative to industry guidance as they were up 0.5% m/m.
Please also see the accompanying components charts 4–11 on the next page.
Chart 12 shows a breakdown of the y/y CPI change by component and chart 13 does the same in terms of weighted contributions to the overall y/y change in headline CPI.
Chart 14 breaks down the CPI basket in m/m terms by component and chart 15 does the same thing in weighted terms.
The accompanying table at the back of this publication provides further details including micro-charts and z-score measures of deviations from trends.
As for next steps, the Fed’s preferred measure of inflation is the price deflator for total consumption, or the PCE measures that arrive on January 26th. That is five days before the January FOMC. The core PCE measure has been undershooting core CPI with 0.1% m/m SA prints in October and November. The Cleveland Fed’s ‘nowcast’ for core PCE suggests this could end with the December reading, although it can be off in either direction.
DISCLAIMER
This report has been prepared by Scotiabank Economics as a resource for the clients of Scotiabank. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither Scotiabank nor any of its officers, directors, partners, employees or affiliates accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents.
These reports are provided to you for informational purposes only. This report is not, and is not constructed as, an offer to sell or solicitation of any offer to buy any financial instrument, nor shall this report be construed as an opinion as to whether you should enter into any swap or trading strategy involving a swap or any other transaction. The information contained in this report is not intended to be, and does not constitute, a recommendation of a swap or trading strategy involving a swap within the meaning of U.S. Commodity Futures Trading Commission Regulation 23.434 and Appendix A thereto. This material is not intended to be individually tailored to your needs or characteristics and should not be viewed as a “call to action” or suggestion that you enter into a swap or trading strategy involving a swap or any other transaction. Scotiabank may engage in transactions in a manner inconsistent with the views discussed this report and may have positions, or be in the process of acquiring or disposing of positions, referred to in this report.
Scotiabank, its affiliates and any of their respective officers, directors and employees may from time to time take positions in currencies, act as managers, co-managers or underwriters of a public offering or act as principals or agents, deal in, own or act as market makers or advisors, brokers or commercial and/or investment bankers in relation to securities or related derivatives. As a result of these actions, Scotiabank may receive remuneration. All Scotiabank products and services are subject to the terms of applicable agreements and local regulations. Officers, directors and employees of Scotiabank and its affiliates may serve as directors of corporations.
Any securities discussed in this report may not be suitable for all investors. Scotiabank recommends that investors independently evaluate any issuer and security discussed in this report, and consult with any advisors they deem necessary prior to making any investment.
This report and all information, opinions and conclusions contained in it are protected by copyright. This information may not be reproduced without the prior express written consent of Scotiabank.
™ Trademark of The Bank of Nova Scotia. Used under license, where applicable.
Scotiabank, together with “Global Banking and Markets”, is a marketing name for the global corporate and investment banking and capital markets businesses of The Bank of Nova Scotia and certain of its affiliates in the countries where they operate, including; Scotiabank Europe plc; Scotiabank (Ireland) Designated Activity Company; Scotiabank Inverlat S.A., Institución de Banca Múltiple, Grupo Financiero Scotiabank Inverlat, Scotia Inverlat Casa de Bolsa, S.A. de C.V., Grupo Financiero Scotiabank Inverlat, Scotia Inverlat Derivados S.A. de C.V. – all members of the Scotiabank group and authorized users of the Scotiabank mark. The Bank of Nova Scotia is incorporated in Canada with limited liability and is authorised and regulated by the Office of the Superintendent of Financial Institutions Canada. The Bank of Nova Scotia is authorized by the UK Prudential Regulation Authority and is subject to regulation by the UK Financial Conduct Authority and limited regulation by the UK Prudential Regulation Authority. Details about the extent of The Bank of Nova Scotia's regulation by the UK Prudential Regulation Authority are available from us on request. Scotiabank Europe plc is authorized by the UK Prudential Regulation Authority and regulated by the UK Financial Conduct Authority and the UK Prudential Regulation Authority.
Scotiabank Inverlat, S.A., Scotia Inverlat Casa de Bolsa, S.A. de C.V, Grupo Financiero Scotiabank Inverlat, and Scotia Inverlat Derivados, S.A. de C.V., are each authorized and regulated by the Mexican financial authorities.
Not all products and services are offered in all jurisdictions. Services described are available in jurisdictions where permitted by law.