This analysis of the December CPI report highlights the challenges of interpreting data due to seasonal volatility, particularly in December. While headline and core inflation figures came in relatively close to expectations, year-over-year trends show persistent inflation above the Fed's target. The author raises concerns about the Fed's policy decisions in light of these data, suggesting potential shortcomings in their inflation forecasts.
It is important – and I say it every year – to remember that when we are looking at economic data from December there are massive error bars around the numbers. The government doesn’t report error bars, but they should. Frankly, when it comes toat the headline index level, because the main sources of volatility in the index also happen to be the ones that provide all of the seasonal adjustment s, so we tend to miss estimates roughly as often in December as in other months.
Right, that’s a big prelude discussion. Summing up: don’t get too excited either way with this number. More important is that the overall market has been selling off. 10-year breakevens have risen 14bps, and 10-year real yields have gone up 26bps. How much of this is because of a fear that inflation is turning, is unclear. But in December, the overall data was pretty close to expectations. Core inflation came in at +0.225% m/m, compared to expectations of +0.
So on the macro side, top-down, this does not look like the sort of data that the Fed was expecting when it started easing in September. Since in my opinion this has been eminently foreseeable for a long time when you looked at what was driving CPI, the conclusion must be either that the Fed is just incompetent when it comes to inflation forecasts,the rate cut had nothing to do with economics and was just a political gambit to get Harris elected. None of those answers is flattering.
Incidentally, you’ll also see these in Lodging Away from Home inflation not just in California but in the entire western US. And maybe further, since remote work makes it possible to temporarily relocate almost anywhere. Federal support of the displaced will ensure that is not a 1-month effect. So in shelter, January and February numbers are going to be a lot more important than today’s release.
INFLATION CPI FED SEASONAL ADJUSTMENT ECONOMIC DATA
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