A cooler-than-expected reading on underlying consumer price inflation eased fears about the Federal Reserve having to become more hawkish on interest rate cuts and solidified market expectations for a pause at the central bank's next meeting, experts say.
For the record, headline December CPI increased 0.4% month over month – a slight increase over the 0.3% rate seen in each of the previous four months – to match economists' expectations. On an annual basis, headline CPI rose 2.9%, according to the Bureau of Labor Statistics. Although inflation accelerated on a year-over-year basis, the print comported with market forecasts.
More importantly, core CPI, which excludes food and energy costs and is considered a better indicator of future prices, increased 0.2% after rising 0.3% for four straight months. Not only did that beat estimates for a 0.3% increase, it represented the first drop in the rate in six months.
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On an annual basis, core CPI also came in soft at 3.2% vs the median estimate of 3.3%
"Today's CPI may help the Fed feel a little more dovish," writes Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management. "It won't change expectations for a pause later this month, but it should curb some of the talk about the Fed potentially raising rates."
Zentner adds that the market's initial response showed that "investors appeared to feel a sense of relief after a few months of stickier inflation readings."
As of January 15, futures traders assigned a 97% probability to the Federal Open Market Committee (FOMC) keeping the short-term federal funds rate unchanged at 4.25% to 4.5% at the next Fed meeting. That was up from 95% a day ago, according to CME Group's FedWatch Tool.
Market participants expect fewer rate cuts this year, mostly in increments of 25 basis points (bps), or 0.25%.
With the December CPI report now a matter of record, we turned to economists, strategists and other experts for their thoughts on what the data means for markets, macroeconomics and monetary policy going forward.
Please see a selection of their commentary, sometimes edited for brevity or clarity, below.
Expert takes on the CPI report
"The modest core reading confirmed inflation remains on a downward trend, putting a lid on longer-term yields. The Fed is now less of an issue and investors can start focusing on the expected acceleration in corporate earnings. The bull market might not be dead. Perhaps it was just resting." – David Russell, global head of market strategy at TradeStation
"Some of the market's angst on inflation lessened this morning as a lower than expected core CPI reading added to a lower than expected PPI reading yesterday. Capital markets are responding favorably this morning as a lower than expected core inflation reading eases some pressure on rates. Questions about how much lower rates can go remain, but there is less talk about a Fed not only not lowering rates from here but maybe even having to reverse course before the end of the year." – Steve Wyett, chief investment strategist at BOK Financial
"It is looking less and less likely that an accommodative Fed is the primary force that supports markets in 2025. We think the S&P 500 will make new all-time highs in the year ahead, and it's earnings results and forward guidance that are needed to justify the rally. The positive reports out from banks today bode well for our view that Q4 S&P 500 earnings growth is likely to beat current consensus expectations." – Elyse Ausenbaugh, head of investment strategy at J.P. Morgan Wealth Management
"The headline Consumer Price Index (CPI) came in as expected, with core inflation (excluding food and energy) a tenth below expectations on both a month-over-month and year-over-year basis. Coupled with yesterday's Producer Price Index report, which showed significantly lower than expected wholesale inflation, this week's inflation data should give the Fed some modest additional confidence that progress in bringing down inflation has not stalled entirely and that we're not seeing a resurgence in inflation. While today's report showed continuing progress in bringing down core inflation overall, the increases in prices of items closely watched by consumers could continue to be a drag on consumer confidence, which has already shown weakness on inflation concerns." – David Royal, chief financial and investment officer at Thrivent
"These numbers give the Fed cover to stay patient and wait for additional data to make their next move. Currently, the market is not pricing in a January Fed cut. However, the likelihood of a June cut is now at near 100%. Previous to today's number, the market was only expecting one 25 bps cut in 2025, but now the market is pricing in over 1.5 cuts. Perhaps most importantly, today's CPI number takes additional rate hikes off the table which some market participants were beginning to prematurely price in." – John Kerschner, head of U.S. securitized products and portfolio manager at Janus Henderson Investors
"December's relatively benign CPI report should douse speculation that the Fed's next move will be to tighten policy. Looking ahead, we continue to think that core PCE inflation will fall slightly over the next two months, bolstering the case for the FOMC to ease policy at its meeting in late March. The combination of a stronger dollar, flat energy prices and unwinding post-hurricane replacement demand for vehicles will ensure any further increase in CPI core goods inflation is modest." – Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics
"After recent red-hot data, today's softer than expected core CPI reading should help cool fears of a reacceleration in inflation. While today's release is likely insufficient to put a January rate cut back on the table, it strengthens the case that the Fed's cutting cycle has not yet run its course. With labor market data remaining robust, however, the Fed has scope to be patient and more good inflation data will be required for the Fed to deliver further easing." – Tina Adatia, head of fixed income client portfolio management at Goldman Sachs Asset Management
"The market can breathe a sigh of relief thanks to cooler than expected readings on core CPI and PPI this week. Anxiety seemed to be building amongst investors over the past few weeks from fears of inflation resurfacing and rising bond yields. Inflation remains stubborn, but the disinflationary trend is slowly moving in the right direction. There are numerous reasons why inflation is unlikely to rear its ugly head again, even though there were concerns of another wave. The labor market isn't inflationary as the labor market is roughly balanced and nominal wage growth is running consistent with the Fed's inflation target. Plus, solid trend productivity growth is disinflationary. The stickiest component of inflation remains shelter, but even that component is moving in the right direction as the year-over-year inflation growth was 4.6%, which is the smallest one-year gain since January 2022." – Eric Sterner, chief investment officer at Apollon Wealth Management
"Wednesday's softer-than-expected CPI print offers some relief, especially after last Friday's hot employment numbers, that the Fed may be able to still cut interest rates in 2025. Even if the Fed cuts rates in 2025, it's likely to be six to eight months away, as we are still too far from the Fed’s inflation target for the Fed to continue their rate cut march anytime soon. The Fed needs to see more employment and inflation prints before they can start to telegraph their interest rate plans. The market is pricing only one rate cut in 2025, with that cut likely taking place in the fall. The fact that this rate cut is priced out so far out in the future shows that investors are extremely skeptical of an accommodative Fed this year." – Skyler Weinand, chief investment officer at Regan Capital
"Modest inflation and a strong labor market. The CPI number is relatively good news. The Fed can be patient and the economy is healthy. This is not a time to run for the hills. This may be the last inflation reading before tariffs and a meaningful shift in foreign policy. At the same time, renewed spirits among small businesses and modest producer inflation are good signs. There are opportunities outside of the broad indexes that continue to look attractive." – Scott Helfstein, head of investment strategy at Global X
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