Axios Macro

A white telescope

This morning's Consumer Price Index shows the return to low inflation might not be a completely smooth ride — and the Federal Reserve may be more cautious in embracing rate cuts than markets are betting. More below.

Situational awareness: Initial jobless claims barely changed last week, at 202,000, remaining at rock-bottom levels as the new year began.

Today's newsletter, edited by Javier E. David and copy edited by Katie Lewis, is 591 words, a 2-minute read.

1 big thing: Sticky inflation problem

Illustration of the 3M headquarters facade with a sticky note with a dollar sign on it.

Illustration: Brendan Lynch/Axios

Score one for those who warned inflation would be hard to conquer. December's inflation report shows why that might be the case.

Why it matters: The nation is past the crisis inflation era seen in recent years. But prices in key areas of the economy are still rising more quickly than consumers — and policymakers — would like.

  • Sticky inflation, if sustained, could complicate expectations of near-term interest rate cuts — and White House officials' hopes of a brighter inflation landscape in the run-up to the 2024 election.

Driving the news: The Consumer Price Index rose 0.3% last month, the government reported today, compared to November's 0.1% increase.

  • In the 12 months through December, the index is up 3.4%, compared to the 3.1% increase in November.
  • Core inflation, which excludes food and energy costs, rose 0.3% — the same as the prior month. It's up 3.9% in the year through December, compared to 4% in November.

Between the lines: By one gauge, core inflation looks to be stuck. That measure rose at a 3.3% annualized pace over the past three months, little changed from 3.4% in November and well above the 2% inflation the Fed aims for.

  • (Worth noting: The Fed targets a different inflation measure due later this month.)

What they're saying: "These are not bad numbers, but they do show that disinflation progress is still slow and unlikely to be a straight line down to 2%," Seema Shah, chief global strategist at Principal Asset Management, wrote in a note.

Details: The services sector is key to elevated price pressures, even as the prices of many goods are falling. The biggest contributor is shelter costs — which was the largest factor in December's monthly CPI increase.

  • Price for shelter rose at a slightly quicker pace (up 0.5%) than in November. Economists have been looking for a cooling based on private-sector data on rents, but the report shows that prices remain firm for now.
  • Other sectors within services — including medical care and auto insurance — saw prices rise more quickly.

The intrigue: "The evolution of the data illustrates just how difficult the last mile of efforts to restore price stability will be," RSM chief economist Joe Brusuelas wrote this morning.

2. Not great news for a March rate cut

Fed chair Jerome Powell

Fed chair Jerome Powell. Photo: Liu Jie/Xinhua via Getty Images

The central question for the Fed right now is when inflation and other data will offer a green light for interest rate cuts. No such go-ahead was apparent in today's data.

  • The latest numbers support the cautious approach to rate cuts seemingly embraced by most Fed officials themselves — as opposed to the quicker pace markets have priced in.

State of play: Futures markets are now pricing in 67% odds of a rate cut at the Fed's March meeting — a possibility that policymakers haven't ruled out but haven't exactly embraced, either.

  • New York Fed president John Williams said in a speech yesterday afternoon that rate cuts will only be in play once the central bank is sure inflation is cooling.
  • "[I]t will only be appropriate to dial back the degree of policy restraint when we are confident that inflation is moving toward 2 percent on a sustained basis," Williams said.

What they're saying: "While core inflation is continuing to trend in the right direction, we don't see the Fed in a rush to cut rates," wrote JPMorgan chief U.S. economist Michael Feroli in a note.

  • "With all the key data now in hand, it's hard to see how the January FOMC meeting would result in guidance to ease at the subsequent meeting in March (as markets apparently still expect)."