US Core CPI
U.S. inflation in March came in short of almost everyone’s expectations, surprisingly, but higher prices as a result of tariffs and supply chain disruptions are on the way.
After all the volatility and heated discussions about tariffs, we went back to monitoring the macroeconomic data, and received a very positive report on the US CPI for March. Headline prices fell 0.1% month-on-month, and core inflation (excluding food and energy prices) rose by just 0.1%. In fact, it did not exceed 0.057% when measured in the nearest three decimal places. The consensus called for a rise of 0.1% and 0.3%, respectively, with some market participants fearing a decline of 0.4% or even 0.5%, assuming that some companies raise prices proactively before the tariffs implement.
Lower prices in key regions will not last as the effects of tariffs worsen. Details indicate a 2.4% month-on-month drop in energy prices, mainly due to a 6.1% drop in gasoline prices. Airfares fell another 5.3% month-on-month after falling 4% in February, supporting the narrative of airlines’ response to poor bookings.
Entertainment prices fell by 0.1%, which is very unusual and indicates a slowdown in discretionary spending, and that entertainment and entertainment venues have begun to respond. Medicare prices fell by 1.1% (prescription drugs prices fell by 2%), something I find difficult to explain and expect to reverse soon, but the 0.7% month-on-month drop in used car prices is easier to understand after the large increases over the past five months.
But this will not be sustainable given the 25% foreign car charge.
which we believe will discourage potential buyers from purchasing a new car. Instead, they are more likely to keep their current cars for longer, limiting the supply of used cars.
The impact of the US Core Consumer Price Index on financial markets
Financial markets showed calculated optimism following the release of the December Core CPI report. The steady inflation reading gave traders and investors some reassurance that inflationary pressures may not escalate, a development that has been crucial in shaping investor sentiment for most of 2024. Markets have already set a rate in a scenario where the Fed has largely completed its rate hike cycle for now. The stability of the core CPI, along with other economic indicators, suggests that the Fed’s strategy of tightening monetary policy may have had the desired effect, especially in calming the overheating economy without causing a deep recession..
In equity markets, especially major indices such as the S&P 500.
stable inflation data was hailed as a green light for continued economic growth. Investors responded positively to suggest that the Fed may be able to refrain from further rate hikes or even consider cutting rates if inflation continues to moderate. A stable inflation environment usually favors growth stocks.
especially in sectors such as technology and discretionary consumer goods, which benefit from lower borrowing costs. Meanwhile, defensive sectors like utilities and consumer staples.
which usually show more resilience to inflationary pressures, have experienced less pronounced movements, as the market has already priced in their previous outperformance.
On the other hand, bond markets reacted mixed to the core CPI report. The continuous reading of 0.3%m/m suggests that inflation is not accelerating beyond expectations, preventing bond yields from rising significantly. On the other hand, markets remain skeptical about long-term inflation trends, which were difficult to predict in the post-pandemic era.
US Core CPI forecast monthly for the current month
As we approach January 2025, expectations for the CPI report are closely linked to broader economic trends. Analysts expect the core CPI for January to remain in the same 0.3% range.
with many expecting a slight slowdown due to seasonal factors and ongoing economic adjustments. However, the consensus is that inflation will not return to pre-pandemic levels of stability.
and instead, the current “moderate inflation” environment will continue. While the economy is expected to remain stable.
several variables could influence the final CPI figure for the current month.
The main factor to watch in January will be any impact from seasonal changes in prices.
especially in areas such as clothing, healthcare and transportation. Historically, January can see volatility due to post-holiday sales, adjustments in energy costs, and seasonal differences in commodity prices. In addition, labor market data will be important in shaping the expectations of the core consumer price index. If the labor market continues to show signs of strength.
with low unemployment and rising wages, there may be upward pressure on wages, which could then lead to price growth. If wage inflation continues to accelerate, it could provide more fuel for the Fed’s inflation concerns and push it to act more aggressively in future monetary policy adjustments.
Another crucial aspect will be how energy prices behave in the first months of 2025.
While energy excludes from the core CPI, fluctuations in the energy market often influence broader price trends indirectly.
If energy prices rise due to geopolitical tensions, weather-related turbulence.
or supply constraints, there could be a cascading effect on the broader economy raising costs in other sectors, increasing pressures on the core consumer price index.
