December Inflation Preview: What Will It Take To Trigger A Fed Rate Cut In Q1 2024?

The pivotal economic event of the week is the release of the December inflation report, which holds crucial information for the Federal Reserve’s decision-making during its meetings in the first quarter of 2024.

While no interest rate changes are expected at the Jan.31 meeting, traders have already set their sights on the Mar.20 meeting, assigning a 70% probability to a rate cut.

Henceforth, inflation reports will be the critical variable that both the market and the Fed will scrutinize for their respective decisions.

December Inflation Report: What Economists Anticipate

• Economists are projecting that the headline Consumer Price Index (CPI) will have increased by 3.2% compared to the previous year, representing a slight uptick from November’s 3.1% annual inflation rate. This would mark the first rise in the annual rate since July.
• On a monthly basis, the headline CPI is expected to advance by 0.2% from November, accelerating from the previous 0.1% increase.
• The core CPI, which excludes volatile items, is predicted to have risen by 3.8% compared to December 2022, indicating a decline from the previous 4% annual rate and the lowest core inflation rate since May 2021.
• On a monthly basis, the core CPI is expected to increase by 0.3%, maintaining its previous uptick.

Insights from Analysts

Manuel Abecasis and Spencer Hill of Goldman Sachs are forecasting slightly higher-than-consensus figures for both the headline (3.3%) and core CPI (3.9%). They highlight three key trends within the December report: a decrease in the prices of both used and new cars, a significant 5% increase in airfares, and a slowing trend in shelter inflation.

Looking ahead, they anticipate further disinflation in 2024 due to rebalancing in the automobile, housing rental, and labor markets, with a potential offset from delayed acceleration in healthcare costs.

Bank of America expects similar annual inflation rates, which they still consider a sign of soft inflation. Economists Stephen Juneau and Michael Gapen believe that monthly inflation rates at or below 0.3% would align with their projection of a 100 basis point reduction in Fed interest rates in 2024, with an initial 25 basis point cut expected in March.

“If core CPI were to come in weaker than we expect, at say 0.1% m/m or a soft 0.2% m/m, then market expectations for a March cut and total cuts this year would likely increase,” Bank of America stated.

However, Bank of America also cautions that the potential for further declines may be tempered beyond December due to rising shipping costs linked to issues in the Red Sea and low water levels in the Panama Canal.

Market Reaction To The November CPI Report

In November, the annual CPI rate eased from October’s 3.2% o 3.1%, in line with expectations, marking the lowest annual inflation rate in five months. Core inflation held at 4%, and the monthly rate rose to 0.3% from 0.2%, in line with forecasts.

On the release date of Dec. 12, 2023, the SPDR S&P 500 ETF Trust SPY gained 0.5%, while the tech-heavy Invesco QQQ Trust QQQ rose by 0.8%. Bond prices also saw an increase as Treasury yields fell, with the iShares 20+ Year Treasury Bond ETF TLT rising by 0.3%.

Read more: Bank Of America Predicts 10 2024 Market Surprises: From Booming IPOs To Japanese Equity Surge