US: December CPI should give the Fed confidence to downshift to a 25bp hike – ABN Amro

Data released on Thursday in the US confirmed a slowdown in inflation, with the annual CPI rate falling to 6.5%, the lowest level since October 2021. Bill Diviney, Sr. Economist at ABN – AMRO points out that falling inflation paves way for a 25bp Federal Reserve interest rate hike, instead of a 50 bps hike.

Key quotes:

“The fall was driven largely by further pass-through from lower oil prices to petrol prices, but continued falls in used car prices, and weak medical services inflation, were also a drag. Shelter inflation, and other components of services inflation in contrast remained elevated, as expected.”

“Inflation continues to trend lower in line with our base case, and this should give the Fed the confidence to further downshift to a 25bp hike when the FOMC next meets in early February. In the near term, we expect a renewed drag on headline inflation from falling utility gas prices – reflecting the mild winter and falling wholesale gas prices.”

“For core inflation, while annual inflation should continue to decline, we may see some near term pickup in m/m price growth, as a significant drag in recent months has come from falling wholesale prices for used cars, which for now looks to have stabilized.”