NEWS AND INSIGHTS | INSIGHTS

CIO Notebook: Inflation Softer Following Strong Jobs Report

January 15, 2025
Shannon Saccocia, CFA, Chief Investment Officer—Private Wealth

Perhaps the most important takeaway from today’s print is that it likely quiets the whispers of the need for a rate hike in the next few quarters, creating a firmer foundation for a sustainable broadening out of the equity markets in 2025.

U.S. core CPI was slightly softer than expected following a constructive PPI print earlier in the week and despite evidence of labor market firming in the recent non-farm payrolls report. While U.S. headline CPI was in line with consensus, up +0.4% month-over-month and up +2.9% year-over-year, core CPI decelerated to +0.2% month-over-month and +3.2% year-over-year versus expectations of a +0.3% and +3.3%, respectively.

Energy prices were the driving force behind the slight acceleration in headline CPI in the month, as overall prices rose by +2.6% year-over-year with gasoline up +4.4%. Food prices rose by +0.3% month-over month, and +2.5% year-over-year as food at home was up +3.6% on a year-over-year basis. While admittedly the Fed tends to de-emphasize food and energy prices in their calculus, given the volatility, the persistence of food cost inflation has been cited as a source of dissatisfaction in consumer surveys over the last two years. Offsetting some of the strength in food costs was moderation in the cost of apparel, recreational goods, education and communication products, and alcoholic beverages.

Turning to the softer core CPI print, the deceleration was driven by modest improvements in medical care (up +0.1% versus +0.3% in November) as well as lodging away from home, which fell by -1% in the month. New and used car prices, while still above levels consistent with 2% inflation, were also modestly lower in December than in November. However, shelter remains somewhat problematic, as both rent and owners’ equivalent rent were up +0.3% versus +0.2% the month prior; this remains a challenge for the Fed as they look to deliver consistent progress towards their target. However, in aggregate, there was improvement in core services in December; the measure, which excludes the impact of shelter, cooled to +0.2% and fell to +0.3% on a trailing three-month basis.

A sense of relief has taken hold in the equity and bond markets this morning, as expectations were skewed towards a hotter-than-expected print; this is sending yields modestly lower and equities higher. Our view is that there is still some work to be done in terms of creating confidence for the Fed that additional rate cuts are justified, particularly if the labor market remains on firm footing. Services inflation is moving lower, but very slowly, and the progress being made on goods inflation may be vulnerable to short (or longer) term pressure from tariffs. Perhaps the most important takeaway from today’s print is that it likely quiets the whispers of the need for a rate hike in the next few quarters, creating a firmer foundation for a sustainable broadening out of the equity markets in 2025.

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