U.S. CPI inflation increased 0.4% month-over-month in December, following a 0.3% increase in November.
Core inflation, a measurement that strips out volatile food and energy prices, came in slightly below expectations, rising just 0.2% to close out 2024. This marked a break from the previous four months, where core inflation consistently rose by 0.3% each month.
On an annual basis, headline inflation rose to 2.9% in December, up from 2.7% in November. Core inflation, however, edged slightly lower, coming in at 3.2% compared to the previous month.
“Softer core CPI inflation in December will give the Fed some breathing room ahead of the uncertain impact of tariffs,” wrote BMO’s Sal Guatieri in a report.
Guatieri noted that large increases in automotive costs and airfare were tempered by drops in clothing, medical care and tuition costs. He also noted that service prices, not including energy and rents, also slowed to a pace of 0.2% after a run of large gains the last quarter.
“Inflation has still slowed from where it was a year ago, but evidence has mounted that the persistent run of U.S. economic growth outperformance is also limiting the pace of slowing in inflation,” wrote RBC’s Nathan Janzen.
January rate cuts unlikely for Fed, but March remains in play
Easing inflation in the U.S. could pave the way for lower interest rates in Canada, which may bring relief to mortgage rates.
As Bruno Valko, VP of National Sales at RMG, highlighted in a recent release, this connection is worth watching.
“United States inflation data is probably the single most important data release impacting Canada bond yields,” he wrote. “Of course, what happens in Canada is important…but Canada 5-year bond yields directionally follow 10-year U.S. Treasury yields. And U.S. inflation is key.”
Valko also noted that Canada’s 5-year bond yield, which typically leads fixed mortgage rate pricing, dropped 0.08% immediately following the announcement.
Although December’s U.S. CPI data showed some progress on core inflation, most analysts agree it’s still too high for the Fed to consider a rate cut later this month.
“Fed members have indicated a desire for a more gradual pace of interest rate cuts this year, and we still think they will take a pause in January,” wrote TD Economist Leslie Preston. She added that last Friday’s “healthy” payrolls report provided “little reason for the Fed to cut rates quickly.”
Janzen echoed similar sentiments, noting, “The tick lower in core price growth in December follows a string of upside surprises and shouldn’t be enough to justify another Federal Reserve rate cut later this month.”
“We continue to expect the Fed will need to keep interest rates higher for longer than other regions to offset the inflationary impact of a resilient economy and large government budget deficit for this point in the economic cycle, and do not expect the Fed to cut the fed funds target range further this year,” he added.
Even so, further rate cuts remain a possibility, according to Preston. “We expect that a March cut remains on the table, with today’s CPI providing reassurance that inflation data surprises are not all in one direction.”
bond yields Bruno Valko federal reserve inflation leslie preston Nathan Janzen sal guatieri treasuries U.S. CPI u.s. inflation US fed
Last modified: January 15, 2025