Investors Cheer Core CPI, Neglect Headline: Jan. 15, 2025

Investors are rejoicing as this morning’s CPI report featured lighter-than-expected annualized core inflation alongside a welcome deceleration. Meanwhile, equity and fixed-income players alike are ignoring the acceleration in headline price pressures across both the 31-day and 12-month figures and are buying stocks and bonds aggressively. Indeed, major benchmarks are surging and yields are tumbling amidst expectations that another Fed rate reduction has been advanced to June. Elsewhere, UK cost forces arrived beneath projections, offering a well needed reprieve across the Gilt curve, which is lighter by 18 to 20 bps across durations. Shifting east, Germany’s economy shrank for the second consecutive year in 2024 while the EU’s industrial production numbers came in beneath estimates, illustrating the region’s lack of manufacturing buoyancy. 

Core Cooler, Headline Hotter

Consumer prices accelerated last month as broad-based cost hikes permeated throughout the economy. December’s Consumer Price Index (CPI) rose 0.4% month over month (m/m) and 2.9% year over year (y/y), exceeding the 0.3% median estimate but arriving in-line on the annualized figure. The core segment, which excludes food and energy due to their volatile characteristics and is considered a better gauge of longer-term trends, climbed 0.2% m/m and 3.2% y/y, as projected on the shorter-term figure but a tenth of a percent lighter on the longer-term number. November’s results, meanwhile, came in at 0.3% and 2.7% for headline and 0.3% and 3.3% for core.

US Experienced Broad-Based Price Increases

Leading the price level to the upside were significant jumps in crude oil and natural gas charges, which weighed on household and corporate budgets via the ensuing refined products. Costs for gasoline and heating led the charge last month among major categories with the components increasing 4.4% and 2.4% m/m. But commodities weren’t the only spoilers—goods inflation made a comeback with prices for used and new automobiles increasing 1.2% and 0.5% m/m. Also driving costs to the upside were transportation services, food at markets, food at dining establishments, electricity, shelter, medical care services and apparel, which saw charges advance 0.5%, 0.3%, 0.3%, 0.3%, 0.3%, 0.2% and 0.1

Euro Area Production Limps Along

Euro area industrial production expanded 0.2% m/m in November, maintaining the same growth rate as the preceding 31-day period, but declining 1.9% y/y. The monthly change missed the 0.3% median estimate but the annualized version arrived in-line. On a m/m basis, the increase was attributed primarily to gains in energy and consumer durable goods. Broadly speaking, the euro area is struggling with weak demand from Asia as the Chinese economy flounders, higher energy costs and competition from cheaper products produced by other countries. The euro area’s m/m increase occurred despite the 20-member state group’s largest constituent, Germany, reporting that its gross domestic product (GDP) contracted 0.2% in 2024. While that was better than the 0.3% decline expected by analysts, it followed a 0.3% drop in 2023. The country faces a variety of headwinds, including strong competition in automobile manufacturing from China and heavy borrowing costs that are weighing on durable goods transactions.

UK Housing Inflation Nears 13-Year High

The UK’s retail and wholesale gate prices climbed less than expected last month despite accelerating from November at a time when Great Britain is bracing for potential trade conflicts, economic weakness and fiscal issues, including planned tax hikes. A different picture emerges, however, when housing costs are thrown into the mix. The headline CPI, which doesn’t include owner occupied shelter, increased 0.3% m/m in December, below the analyst forecast of 0.4% but faster than the preceding month’s 0.1% pace. On a y/y basis, the gauge moved in the opposite direction, advancing only 2.5% compared to expectations for a repeat of November’s 2.6% result. The CPIH benchmark, which includes housing costs, however, repeated November’s 3.5 y/y result but month-to-month it climbed 0.3% compared to the prior period’s 0.2%.

On a m/m basis, the following items experienced the largest price increases as noted:

Categories that experienced lower prices and the extent of the declines were as follows:

• Clothing and footwear, 0.5%
• Alcohol and tobacco, 0.2%
• Restaurants and hotels, 0.1%

The recreation and culture category and education classification were unchanged during the period.  

Markets Stage Broad Rally

Markets are running hard with financial conditions loosening amidst a weaker dollar, softer borrowing costs, compressing spreads and soaring stocks. Every major, domestic equity benchmark is gaining more than 1% with the Nasdaq 100, Russell 2000, S&P 500 and Dow Jones Industrial indices up by 2%, 1.9%, 1.6% and 1.5%. Sectoral breadth is positive with 10 of 11 segments higher and led by financials, technology and consumer discretionary, which are gaining 2.3%, 2% and 1.9%. Consumer staples is the sole loser in today’s session; it’s down a modest 0.2%. Treasurys are catching strong bids with the 2- and 10-year maturities changing hands at 4.28% and 4.66%, 9 and 14 basis points (bps) lighter on the session. The dollar is weaker too but not by as much as we’d expect, with its index trimming just 19 bps. The greenback, however, is depreciating relative to all of its major counterparts, including the euro, pound sterling, franc, yen, yuan and Aussie and Canadian tenders. Plunging interest rates and a softer greenback are pushing commodities higher, with silver, crude oil, copper, lumber and gold up 1.6%, 1.0%, 0.5%, 0.1% and 0.1%. WTI crude is trading at $78.85 on lower inventories stateside and worries that some Russian supplies will increasingly fail to reach the market. 

Reflation Risk Persists

Today’s mixed CPI report is emblematic of investors taking the glass half full perspective and remaining in bull market mode. Market participants are certainly considering the core version of the indicator more so than the headline, but the trend of price pressures remains higher not lower. To be precise, the core CPI increased 3.238% y/y, meaning that a difference of 0.012% would’ve led to a rounding at 3.3% and met the median estimate. Against that backdrop, folks totally ignored the broadness of the price increases, spanning across all major categories as well as the 0.4% m/m climb in headline prices, which arrived ahead of expectations and marked a hastening. Additionally, the overall gauge accelerated from 2.7% to 2.9% y/y. From where I sit, this CPI report points to inflationary forces picking up steam and gathering contributions from the three major categories: services, goods and commodities. Finally, the disinflation train from 2022 has been driven primarily by goods deflation and commodities helping here and there, while services just haven’t cooperated throughout, signaling a risk of reflation as adversarial trade policies and heightening geopolitical tensions can further fuel price increases across the segments that helped on the inflationary front during the past three years.

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