US core inflation expected to have cooled in latest data release

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US core inflation is expected to have edged slightly lower in the year to December, as the impact of recent declines in the price of goods begins to peter out.

The core consumer price index reading, out at 8:30am Washington time on Thursday from the Bureau of Labor Statistics, is set to show that prices rose by 3.8 per cent in the year to December, according to a Bloomberg poll of economists, down from an annual rate of 4 per cent in November. The month-on-month rise is forecast to stay at 0.3 per cent.

Core inflation, which strips out changes in the costs of food and energy, is closely tracked by economists because it offers a better sense of how persistent price pressures in the US economy are likely to prove.

The so-called headline inflation rate, which includes those costs, is expected to edge up to 3.2 per cent annually, from 3.1 per cent in the year to November, and by 0.2 per cent month on month. The monthly climb in November was slightly less at 0.1 per cent.

The data comes as the US Federal Reserve tries to decide when to cut interest rates from their current level of 5.25 to 5.5 per cent, a 23-year-high reached as the central bank has sought to tamp down stubborn inflation.

The sharp fall in inflation in the US and Europe over the second half of 2023 has led officials to all but rule out more rate rises. However, they still want more evidence that price pressures are now low enough to leave them on track to hit their inflation target of 2 per cent before they decide to lower borrowing costs.

Economists note that much of the recent deceleration in inflation reflected a reversal of the sharp rises in the cost of some goods witnessed during the early months of the coronavirus pandemic. The effects of that reversal on the inflation numbers could soon abate, however.

“The big picture is that a lot of the inflation that we saw [from supply chain disruptions] did end up being transitory,” said Robin Brooks, chief economist at the Institute of International Finance.

“Of course, the bulk of the story on goods price deflation has played out. But it’s still a very big story. We see the trough coming towards the end of the first quarter, or the beginning of the second. So we’ve not seen the end of it yet,” Brooks said.  

The CPI number is not rate-setters’ preferred measure of inflation, with most on the Fed’s monetary policy committee focusing on the personal consumption expenditures index. However, PCE data for December is not due until January 26, five days before the end of the next Fed meeting.

While rate-setters think a drift of inflation towards their target will leave them able to make three cuts of a quarter-point this year, markets are anticipating around six.