Consumer prices rose more than expected in December.
December's Consumer Price Index (CPI) showed prices rose slightly by 0.3% from the previous month and rose 3.4% from a year earlier, an improvement from the 3.1% increase seen in the previous month.
Economists on the other hand expect prices to rise by 0.2% on a monthly basis and up by 3.2% annually, based on data from Bloomberg.
When removing the volatile food and energy categories, “core” inflation fell to an annual rate of 3.9% from 4.0% in the previous month. Economists interviewed by Bloomberg expect core inflation of 3.8%. On a monthly basis, core inflation increased by 0.3%, remaining unchanged from the previous month.
This reading will be critical for investors who are increasingly considering the possibility of a soft path, where inflation recedes to 2% without an economic slowdown. Such a decision could mean the central bank's interest rate hike campaign is over and may begin a rate cut, lowering borrowing costs for businesses and consumers.
As of early Thursday morning, the market had a probability of around 69% for the Fed to cut interest rates in March, based on the CME FedWatch Tool.
Fed Governor Michelle Bowman said on Monday that while the Fed may eventually have to raise rates if inflation falls further, "we are not at that point yet." In separate remarks on Monday, Atlanta Fed president Raphael Bostic echoed similar sentiments. "We are in a limiting position, and I am comfortable with that, and I just want to see the economy continue to grow along with this policy setting and expect inflation to continue to reach our 2% level," he said.
