US inflation rises slightly but core prices weaker than expected
US inflation rose at a slightly weaker pace than expected last month, but it is unlikely to be enough to prompt the Federal Reserve into cutting interest rates in the near future.
The latest figures from the Bureau of Labor Statistics showed that the headline rate picked up to 2.9 per cent in December, up from 2.7 per cent previously but in line with expectations.
Core inflation, however, dropped to 3.2 per cent, down from 3.3 per cent in November.
This came after core prices rose 0.2 per cent in December, breaking a run of four consecutive 0.3 per cent increases. Analysts had expected to see another 0.3 per cent increase.
Core inflation strips out more volatile components of the price basket, like food and energy, and is widely seen as a more important measure for assessing the strength of underlying inflation.
“Today’s CPI should provide a boost to markets, relieving some of the anxiety that the US is at the beginning stages of a second inflation wave,” Seema Shah, chief global strategist at Principal Asset Management said.
How will US inflation impact the Fed’s rate call?
Although inflation came in slightly below expectations, analysts do not expect to see the Fed back further interest rate cuts until at least July, reflecting the continued strength of the economy.
According to the most recent jobs report, the world’s largest economy added 256,000 roles in December, accelerating from November and well ahead of economists’ expectations.
Rate-setters are also worried that Donald Trump’s protectionist policies could put up costs massively for US businesses, forcing them to raise prices in response.
Richard Flynn, managing director at Charles Schwab UK, said concerns about Trump’s “potentially inflationary policies” could keep the Fed on hold until the summer.
Nevertheless, the Fed will still be glad to see signs of easing price pressures in the economy.
Before the figures were published, traders thought the Fed would have to wait until September to cut rates, but markets now expect a July cut.
The dollar weakened as a result while US equities look set to open higher, helped by strong earnings from Wall Street’s largest banks.
Lower inflation will also ease some of the pressure on government bond markets, which have suffered a bruising sell-off in recent weeks as fears about inflation grew.
“All in all, a positive report,” Neil Birrell, chief investment officer at Premier Miton Investors, said.
“Although it’s not enough for them (the Fed) to change policy, it will satisfy the bond markets.”