U.S. December CPI Released Eases Rate Hike Outlook

U.S. December CPI Data Released, in Line with Market Expectations

On Wednesday, the U.S. December Consumer Price Index (CPI) data was released, showing a year-over-year increase of 2.9%. This marks the third consecutive monthly rebound, reaching its highest level since July 2024 and remaining above the Federal Reserve’s 2% target. The previous value was a 2.7% increase. Month-over-month, the CPI rose by 0.4%, aligning with market expectations and slightly higher than the prior month’s 0.3% growth.

Core CPI growth slowed to 3.2% year-over-year, the lowest level since August 2024, and fell below market expectations. Prior to the release of the December CPI data, core CPI growth had remained at 3.3% for the past four months. The annualized growth rate of core CPI over the past three months decreased to 3.3% from 3.7% the previous month. While core inflation remains elevated, the data indicates a halt to the upward trend observed in the prior two months.

Energy prices were a significant driver of December’s CPI increase, accounting for over 40% of the overall monthly growth. Notably, gasoline prices surged by 4.4% during the month.

Analysts' View: Rate Hike Expectations Ease, Rate Cuts Await Confirmation

Analysts broadly agree that the December CPI data indicates easing inflationary pressures, significantly reducing market expectations for further rate hikes. However, the consensus suggests that the timeline for potential rate cuts remains uncertain.

Bloomberg analyst Chris noted that although the December CPI data provides positive news for the Federal Reserve, the robust labor market continues to pose challenges. He emphasized that the Fed would likely need to observe several more months of inflation improvement before considering rate cuts.

Aditya Bhave, an analyst at Bank of America, predicted last week that the Federal Reserve is unlikely to implement further rate cuts before 2025. Speaking to Bloomberg Television, Bhave described the latest CPI figures as “solid data” but maintained that there is no compelling reason for the Fed to implement significant rate reductions at this stage.

Bloomberg Intelligence (BI) analysts Ira F. Jersey and Will Hoffman stated that the CPI report, which was largely “in line with expectations,” offered relief to market participants concerned about potential upside inflation surprises. Jersey highlighted that, given the economy’s resilience, the Federal Reserve appears to be nearing the end of its rate hike cycle. However, he noted that rate cuts would require additional supportive economic data and projected that the Fed may consider its first rate cut as early as March 2025.

Federal funds futures indicated that traders lowered their expectations for the likelihood of no rate cuts throughout 2025, with the probability dropping from 26% on Tuesday to 15%. Wall Street analysts largely concur that while the Fed is likely to maintain its current policy stance this month, the December CPI report has reduced pessimism regarding future rate cuts and diminished the likelihood of further rate hikes.

Market Reaction: Stocks Surge, Dollar Weakens

The release of the CPI data triggered significant market movements. On the day of the data release, the U.S. dollar index experienced a brief decline, while the three major stock indices rallied sharply that day. The Nasdaq ended a five-day losing streak, the Dow Jones Industrial Average climbed over 700 points, and the S&P 500 posted its largest single-day gain since November 2024.Furthermore, spot gold prices saw a short-term surge, while recent selling pressure in the bond market eased, leading to a slight decline in U.S. Treasury yields.