The latest report on inflation, scheduled for release on Thursday at 8:30 a.m. ET, is eagerly awaited by investors seeking insights into the Federal Reserve’s potential interest rate adjustments. Projections suggest a slight uptick in the annual headline inflation rate for December, reaching 3.2%, compared to the previous month’s 3.1%. However, economists anticipate a dip in “core” inflation (excluding food and energy categories) to an annual rate of 3.8%, down from the previous month’s 4.0%.
This data holds significance for investors, as they gauge the likelihood of a soft landing scenario, where inflation recedes to 2% without triggering an economic downturn. A successful soft landing could signal the end of the central bank’s interest rate hikes, potentially paving the way for rate cuts to reduce borrowing costs for businesses and consumers.
Bank of America economists anticipate slightly higher readings for both headline and core inflation than the consensus. Even with “core” CPI at 3.9% in December, there remains a possibility of a Fed rate cut in March, according to the BofA economics team. US economist Stephen Juneau notes that aligning with their forecast would affirm progress toward the Fed’s 2% target, suggesting a trajectory for a 25 basis points cut in March followed by quarterly adjustments throughout the year.
On a monthly basis, economists project a 0.2% increase in prices for December, up from the previous month’s 0.1%. Core inflation is expected to rise by 0.3% month over month, mirroring November figures.
Within the report, Goldman Sachs identifies three crucial areas: car prices, airfares, and shelter. While car prices and shelter are expected to continue their downward trend, airfares pose an upside risk for the December report. Goldman’s real-time price measures for airlines indicate a substantial increase, potentially contributing to a 5% rise in December airfare prices and a 3 basis point impact on “core” CPI.
Looking ahead, Goldman economists Manuel Abecasis and Spencer Hill predict ongoing disinflation in 2024 due to rebalancing in the auto, housing rental, and labor markets. They forecast year-over-year core CPI inflation of 2.9% and core Personal Consumer Expenditures inflation of 2.2% in December 2024.