US Stocks Rise On Mixed Inflation Data

• December CPI rose 0.4% month-over-month, driven by higher food and energy costs, with overall inflation up 2.9% from a year earlier.

• Core inflation slowed to 3.2% year-over-year, offering market optimism despite ongoing inflationary pressures.

• Fed likely to hold rates steady through mid-2025, with interest rate cuts still unlikely in the near term despite recent market gains.

  
  

A Mixed Inflation Report

The Consumer Price Index rose 0.4 percent from November, and was up 2.9 percent from a year earlier, up .2 percentage points on an annual basis. December marked the fastest one-month increase in prices since February, largely driven by continual rises in the price of eggs and other groceries.

Despite the concerning news on overall inflation, the market celebrated progress on core inflation, which strips out food and fuel prices which tend be more volatile. Core inflation rose 3.2 percent from a year earlier after reporting three straight months of 3.3 percent rises. Forecasts hadn't anticipated a slowdown in core inflation, so this was a welcome surprise to the market, and one that was very much needed given last weeks jobs report.

The news was enough to strongly boost markets as some concerns over the Fed's slowing interest rate-cutting campaign were subsided. The S&P 500 is now on track to post its best week since Novembers election day rally.

This is mostly due to the fact that many expect the Federal Reserve to be closely watching inflation as its key measure for upcoming policy decisions. While inflation has made substantial progress since its peak of over 9 percent in mid 2022, recent progress has slowed and the employment situation remains strong. Overall inflation has only come down .2 percentage points from January 2024, where it measured 3.1%.

Source: U.S. Bureau of Labor Statistics, chart by CNBC

Why Consumers Might Not Feel The Progress

While the latest core inflation data implies good news on the core prices, overall inflation is typically a greater measure of what everyday consumers recognize. Food prices are up 2.5 percent on an annual basis, energy was up 2.6 percent for the month driven by a 4.4 percent increase in gasoline prices. In some more specific goods the annual increase has been substantial; egg prices are now up 36.8% for the year.

For investors this report suppressed yields and provided some relief in equity markets, but corporate economist Robert Frick noted that “this was a particularly painful report” for consumers. In a separate report released by the Bureau of Labor Statistics, average hourly earnings fell for the month by .2 percent, setting the annual gain at just 1 percent for 2024, adjusting for inflation.

It May Be Too Early To Celebrate

The market has undoubtedly priced in more optimism for the Feds 2025 policy, as yields saw their largest one day decline in nearly six months following the CPI release. However, while December's inflation report likely quells any talk of the Federal Reserve potentially raising rates, rate cuts still remain unlikely anytime soon, especially following the unprecedented strength shown in employment data last week.

For now the CME FedWatch, which tracks the probabilities of interest rate movements, signals that the market expects almost with certainty that interest rates will remain at their 4.25% - 4.50%. In fact, probabilities of a rate cut don't become greater than 40% until the Feds June 18th meeting. Between then, it will take a series of consecutive reports showing progress on inflation or unemployment to begin rising for the Fed to take any earlier action.

Fed chair Jerome Powell has also indicated that the committee is more concerned with trends in inflation and employment rather than isolated reports, reinforcing the fact that it will likely take a few more releases of favorable economic data before those trends spell themselves out.