US Consumer Prices Slow to 6% Range... Fed Gains Momentum to Adjust Pace (Comprehensive)

[Asia Economy New York=Special Correspondent Joselgina] The US Consumer Price Index (CPI) inflation rate, which surged to the 9% range last summer, has slowed down to the 6% range. This has strengthened the possibility of the Federal Reserve (Fed), the central bank, further moderating the pace of rate hikes.

[Image source=Reuters Yonhap News]

According to the US Department of Labor on the 12th (local time), the December CPI rose 6.5% compared to the same month last year. This marks the fifth consecutive month of a reduced rate of increase. It is the smallest increase in 14 months since October 2021. The CPI inflation rate, which had jumped to 9.1% in June last year, slowed to 7.7% in October and has now fallen to the 6% range.

Notably, the December CPI also fell by 0.1% compared to the previous month. This is the first time the CPI has decreased month-over-month since May 2020, right after the COVID-19 outbreak.

The core CPI, which excludes the volatile energy and food sectors, rose 5.7% year-over-year and 0.3% month-over-month. The core CPI inflation rate returning to the 5% range is the first time in five months since July last year (5.9%).

With the confirmation of inflation easing in the December CPI, the market is welcoming the news. There are growing expectations that the Fed may reduce the rate hike to 0.25 percentage points at the upcoming Federal Open Market Committee (FOMC) regular meeting in February. For the Fed, this CPI data can be seen as evidence that its tightening policies are proving effective.

According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds futures market on this day reflected over a 95% probability of a 0.25 percentage point increase (a baby step) in February. This is higher than the 62% level a week ago and 76% the day before. The possibility of a 0.5 percentage point increase (a big step) has fallen below 5%.

Morgan Stanley stated, "The December CPI will encourage the Fed to moderate the pace of rate hikes at the February FOMC meeting," maintaining its forecast for a baby step in February. Moody's Chief Economist Mark Zandi said, "A 6.5% increase is still very high," but also noted, "Inflation is slowing rapidly."

Patrick Harker, President of the Philadelphia Federal Reserve Bank and considered a hawk within the Fed, said at an event, "The era of raising rates by 0.75 percentage points at once is over," adding, "Going forward, 0.25 percentage points will be appropriate." The day before, Susan Collins, President of the Boston Federal Reserve Bank, also expressed support for a 0.25 percentage point increase at the February FOMC in an interview with the New York Times (NYT). Previously, after four consecutive giant steps (0.75 percentage point hikes), the Fed has slowed the pace of tightening to big steps since December last year.

However, the market expresses concern that, despite the overall easing of inflationary pressures, service prices are rising rapidly. Tim Graf of State Street Global Markets pointed out, "While the overall indicator numbers look good, housing and service-related inflation remain sticky," adding, "Inflation may not fall as quickly as the Fed desires."

Additionally, recently released employment data remain strong, supporting the continuation of tightening. The Department of Labor reported that new unemployment claims for the week of January 1 to 7 totaled 205,000, a decrease of 1,000 from the previous week. This is the lowest level in 15 weeks.

The Fed is most wary of an overheated labor market where demand exceeds supply, driving wage increases and potentially prolonging high inflation. Recent remarks by Fed Chair Jerome Powell have consistently reflected caution regarding service prices and wage growth.

The Wall Street Journal (WSJ) reported, "While goods inflation has fallen rapidly in recent months, service inflation remains on the rise," and noted, "There is an attempt to look beyond core inflation to a narrower range called 'supercore' inflation."

The Fed continues to draw a line against market expectations of a pivot. This is based on the judgment that pivot expectations could negatively affect the Fed's efforts in the fight against inflation. According to the minutes of the December FOMC meeting released earlier this month, none of the 19 FOMC members expected rate cuts to be appropriate in 2023. The dot plot projects the year-end target rate at 5.0 to 5.25%, which is 0.75 percentage points higher than the current level.

President Harker said on this day, "We will raise rates several more times this year and maintain them at a high level." Paul Ashworth, Chief Economist at Capital Economics, pointed out, "The Fed will not stop raising rates until it confirms a cooling labor market and easing wage growth."