CPI: Market Optimism Hinges on Tomorrow's Report, but Fed's Target Remains Elusive

investing.com:

A lot is riding on tomorrow’s US consumer inflation report for December for markets, which are pricing in relatively upbeat news.

Quite a lot of the stock market’s upbeat profile recently is closely linked to forecasts that the worst has passed for inflation, which leaves room for the Federal Reserve to start cutting interest rates.

In that case, the market has a green light to reprice equity prices up, which it’s been doing to no trivial degree in recent months.

Meanwhile, US Treasury yields have fallen recently, largely for the same reason. Tomorrow’s CPI report will provide a reality check on the rosy assumptions of late.

Economists expect a bit of a mixed bag. For the year-over-year headline data, consumer inflation is projected to tick up to 3.2% from 3.1% in November.

That’s still well below the recent trend, but the Fed’s 2% inflation target appears set to remain elusive for the immediate horizon.

The sticky headline data will be offset by expectations for softer core CPI reading, which strips out food and energy in a bid to estimate a more reliable measure of the trend.

This estimate of pricing pressure is on track to ease to 3.8% year-over-year in December. If correct, this crucial measure of inflation will dip below 4% for the first time in nearly three years.

Nonetheless, Vanguard’s senior international economist says that “Prices continue to fall at a rapid clip” vs. the start of 2023, but Andrew Patterson doesn’t expect that the Fed’s 2% target will arrive until late this year at the earliest.

Patterson’s outlook aligns with CapitalSpectator.com’s econometric forecast for core CPI, based on a proprietary ensemble model. By the end of 2024, this estimate of year-over-year inflation is projected to slide to