Stay informed with free updates
Simply sign up to the US inflation myFT Digest — delivered directly to your inbox.
US inflation outstripped forecasts for the year to December, hitting 3.4 per cent and dimming market expectations that interest rates would fall as soon as March.
Economists had expected a rise of 3.2 per cent, up from 3.1 per cent in November.
The core rate also came in higher than economists had hoped, in an apparent vindication of the US Federal Reserve’s caution over cutting rates from their 23-year-high.
US stocks fell following the data showing a headline 3.4 per cent annual rise in consumer prices. The blue-chip S&P 500 and the technology-heavy Nasdaq Composite had both declined 0.4 per cent by mid-morning in New York.
Trading in the bond market was choppy. The two-year Treasury yield, which moves with interest rate expectations, rose immediately following the publication of the data, but later reversed that move, leaving the yield at 4.33 per cent, roughly where it was when the data was released.
In the futures market, traders slightly reduced expectations that the Fed would cut interest rates in March.
Rate setters have said that they want to be confident that inflation was moving towards their 2 per cent goal before dialling back on high interest rates.
“You’re not supposed to react to one data point. But in this case, the Fed is looking for a signal to start. And, with this CPI report, the starting gun didn’t go off,” said Vincent Reinhart, a Fed veteran who is now at Dreyfus and Mellon. “After this, the Fed can’t use their meeting at the end of January to hint that they want to act in March. It’s going to take another round.”
Core consumer price inflation, which excludes food and energy costs, was 3.9 per cent for the year to December, slightly lower than the 4 per cent figure for November, according to the data published by the Bureau of Labor Statistics. But economists had expected 3.8 per cent.
The month-on-month core rate, a key measure of underlying inflationary pressures that the Fed watches closely, was unchanged at 0.3 per cent.
Despite the uptick in December, price pressures fell much more sharply than expected in 2023, prompting the White House to note that inflation was now down about two-thirds from the peak seen during the summer of 2022.
“We saw prices go down over the course of the year for goods and services that are important for American households like a gallon of gas, a gallon of milk, a dozen eggs, toys, appliances, car rentals, and airline fares,” said US President Joe Biden. “Despite what many forecasters were predicting a year ago, inflation is down while growth and the job market have remained strong.”