The December US CPI data appears moderate on the surface but is actually a deceptive "fake-out" laden with pitfalls. According to the latest research reports from Deutsche Bank and Morgan Stanley, this seemingly "favorable" report is saturated with unsustainable noise and statistical distortions. The real test will be the PCE data scheduled for release next week!
Data released on January 13 showed that the December CPI figures met expectations both year-on-year and month-on-month. The core CPI rose 2.6% year-on-year, marking the lowest level since March 2021 and coming in below the expected 2.7%. The month-on-month increase was 0.2%, also below the anticipated 0.3%.
Although the December CPI seemingly provided evidence of cooling inflation, the market reaction was muted, with investors not yet interpreting it as a signal for the Federal Reserve to accelerate interest rate cuts. On January 14, insights indicated that Deutsche Bank and Morgan Stanley attribute this to a key reason: the data might be distorted, and the core PCE inflation gauge—which truly dictates the Fed's policy path—is projected to rebound significantly.
Deutsche Bank analysts stated bluntly in their report that the December CPI data is "full of distortions and outliers." Some of the cooling was due to unusually large declines in information technology goods and wireless telephone services, which together dragged down the core CPI by approximately 6 basis points. Excluding these anomalies, the Cleveland Fed's Trimmed Mean CPI and Median CPI stood at 0.31% and 0.28% respectively, both stronger than the core CPI, indicating that underlying inflation pressures are actually more stubborn.
Morgan Stanley, meanwhile, warned in its report that despite the core CPI missing expectations, its calculations for the core Personal Consumption Expenditures (PCE) Price Index suggest the monthly rate for December could reach 0.46%, far exceeding the CPI's performance. This反常 divergence stems from the differing weightings of goods and services in the two indices—the components with higher weights in the PCE恰恰 experienced larger price increases. The November core PCE Price Index report is scheduled for release next Thursday.
Markets now need to await next week's PCE data to confirm the true trajectory of inflation. Analysis suggests that if the PCE rebounds as expected, the Fed's room for further rate cuts will be significantly constrained.
Deutsche Bank's Breakdown: CPI Heavily "Padded," Outliers Mask True Inflation Rigidity The cooling in the December CPI data is largely attributable to technical factors.
Deutsche Bank pointed out that information technology goods prices fell 2.16%, and wireless telephone services dropped 3.33%. Combined, these two items exerted a downward drag of about 6 basis points on the core CPI. These异常 fluctuations do not represent a sustained trend.
Metrics that better reflect underlying inflation tell a different story.
The report stated that the Cleveland Fed's Trimmed Mean CPI, which excludes outliers, rose 2.95% year-on-year, while the Median CPI increased 3.08% year-on-year. Both figures are significantly higher than the core CPI's 2.64% annual growth. This indicates that when extreme volatility is stripped away, inflation pressures are actually more entrenched.
At the goods level, apparel prices surged 0.59%, marking the second-largest monthly increase since February 2025; prices for household furnishings and supplies rose 0.54%, the third-largest gain since November 2024.
Deutsche Bank believes this may reflect a catch-up from distortions caused by earlier delays in data collection due to the government shutdown. Price collection in November occurred closer to the holiday promotion period, artificially suppressing that month's data, leading to a reverse correction in December.
Deutsche Bank's report noted that shelter costs are showing signs of reacceleration. The primary rent index rose 0.26% month-on-month, and owners' equivalent rent (OER) increased 0.31%, both returning to levels near the average growth rate seen in the first nine months of 2025.
The bank特别指出 that this rebound is not due to data gaps caused by the government shutdown (related effects will appear in April) but represents genuine price increases. While the market普遍看好 the prospect of rent disinflation, this data无疑 throws cold water on that view.
Morgan Stanley's Warning: A Massive "Wedge," Next Week's PCE Could See a Stunning Rebound This might be the most overlooked risk point in the current market.
Morgan Stanley warned that a significant "wedge" is forming between the CPI and PCE indices. Based on this seemingly benign CPI report, Morgan Stanley反而大幅上调 its forecast for the core PCE.
The bank raised its forecast for the monthly core PCE rate in December sharply from a previous 0.37% to 0.46%. This推算 is based on detailed CPI data but yields a conclusion starkly different from the overall CPI performance. This divergence stems from fundamental differences in the weighting schemes of the two inflation measures.
The categories of goods and services that carry higher weights in the PCE恰恰 showed strong performance in December. Video and audio media rental prices soared 19.5% month-on-month, contributing approximately 8 basis points to the core PCE by itself; software price increases contributed another roughly 8 basis points.
Morgan Stanley stated that if these two items were excluded, the estimated core PCE monthly rate would drop to 0.30%, but their significance within the PCE basket cannot be ignored.
Furthermore, Morgan Stanley forecasts that the core goods PCE will show a monthly increase of 0.46%, far exceeding the flat performance of core goods in the CPI. This difference arises from weakness in new and used car prices within the CPI, contrasted with accelerating price increases for appliances, software, electronics, and other goods that hold greater weight in the PCE.
Analysis points out that this divergence poses a dilemma for the Fed. The CPI, as the most familiar inflation gauge to the public, shows cooling, potentially bolstering market expectations for rate cuts. However, the PCE index, which the Fed truly monitors, might indicate reaccelerating inflation. If Morgan Stanley's predictions are accurate, the December core PCE year-on-year rate would climb to 2.90%, significantly higher than November's 2.67%.
Tariff Effects Begin to Surface Signs of the tariff impact are beginning to emerge within the inflation data. Both Deutsche Bank and Morgan Stanley noted the ongoing push effect of tariffs on goods prices.
Morgan Stanley's breakdown shows that prices for goods more sensitive to tariffs rose again in December, continuing an upward trend after brief declines in October and November.
Deutsche Bank特别指出 that although apparel prices haven't yet明显 reflected the tariff impact, pressure is building upstream in the supply chain. Import prices and the Producer Price Index (PPI) for apparel categories indicate that pipeline pressures are forming. This suggests that price increases at the consumer level may only be a matter of time.
How Will the Fed React? Analysis believes that faced with data full of noise, the Fed is unlikely to rush into signaling further rate cuts.
Deutsche Bank clearly stated that the December CPI data is a mixture of a catch-up from the distorted November data and signals of genuine weakness. The Fed "will likely want to see more data before it is comfortable enough to signal any further cuts."
Morgan Stanley, on the other hand, believes the Fed can识别 the "noise" in the data and "will likely downplay the apparent strength shown in the core PCE推算." Even so, the data uncertainty itself is sufficient for the Fed to maintain a cautious stance.
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