The Spark of Interest Rate Cut Revives... U.S. Core CPI Drops to 0.2%

Last month, the pace of inflation increase in the U.S. slightly slowed down. Following the Producer Price Index (PPI), which rose less than Wall Street's expectations, the Consumer Price Index (CPI) also fell short of market expectations, reviving hopes for monetary easing by the Federal Reserve.

On the 15th local time, the U.S. Bureau of Labor Statistics announced that the U.S. Consumer Price Index (CPI) rose by 0.4% in December last year. This is a 2.9% increase compared to the same period last year, aligning with market expectations.

Excluding the volatile food and energy sectors, the core Consumer Price Index (core CPI) rose by only 0.2% last month, lower than Wall Street's consensus of 0.3%. Major Wall Street investment banks like JP Morgan and Bank of America recorded below the consensus of 0.26%. Additionally, the annual fluctuation was 3.2%, 0.1 percentage points lower than the 3.3% increase in November.

In the detailed items of the Consumer Price Index, energy prices, which accounted for 40% of the total increase, and transportation service prices due to year-end air demand rose, but the pace of housing cost increases, another key component of the index, slowed down, and the decline in vehicle and medical service costs was notable.

Energy prices jumped from 0.2% in November to 2.6% last month. Natural gas prices surged by 2.4%, and gasoline by 4.4%. The airline fare index increased from 0.4% in November to 3.9% last month.

On the other hand, food prices recorded 0.3%, 0.1 percentage points lower than the previous month, due to a decline in dining out prices (0.3% month-on-month). The increase in new car prices slowed from 0.6% in November to 0.5%, and used cars also slowed from 2.0% to 1.2%. Due to large-scale year-end discount events, clothing prices also reduced their increase from 0.2% in the previous month to 0.1%.

The chronic service price factor, housing costs, maintained a slowdown from 0.4% in October to 0.3% in November and last month. Medical service prices also rose by only 0.2%, half of the previous month's level.

Due to this Consumer Price Index, which offsets Wall Street's concerns, the Treasury bond yield rally began to change direction. The 2-year U.S. Treasury bond yield, sensitive to the Federal Reserve's monetary policy, fell by 6.8 basis points to 4.297% at 8:45 a.m. local time, reversing from the early morning level of 4.35%.

The 10-year U.S. Treasury bond yield, which serves as a benchmark for global asset prices, was trading at 4.702%, down 8.6 basis points from the previous day, and the 30-year Treasury bond yield was at 4.917%, down 6.8 basis points. The U.S. New York Stock Exchange, which was about to open, also turned to a sharp rise. The S&P 500 futures index began to jump by about 1.4%, the Nasdaq 100 futures by 1.7%, and the Dow Jones futures formed a price rising by more than 580 points, about 1.3%.

The U.S. stock and bond markets have been adjusting due to the stronger-than-expected 256,000 non-farm jobs and the impact of the unemployment rate decline announced by the U.S. Department of Labor last week. According to the Federal Reserve's December Federal Open Market Committee (FOMC), "many participants (members) stated that a cautious approach to monetary policy is necessary due to various factors." Federal Reserve Chairman Jerome Powell also hinted at a willingness to adjust the pace of interest rate cuts, stating in a press conference last month, "I think the economy is in really good shape."

The U.S. Federal Reserve is scheduled to hold its first Federal Open Market Committee meeting of the year on the 29th of this month to continue its interest rate policy. The probability of the Federal Reserve's rate freeze this month, based on the futures market at the Chicago Mercantile Exchange, is as high as 97%. However, due to the easing of the Producer Price Index the previous day and the weakening of the Consumer Price Index today, the probability of a freeze until May has fallen from 55% the previous day to 42%.

Reporter Kim Jong-hak jhkim@wowtv.co.kr