To start, we believe December US CPI may experience a temporary rebound. $iShares 20+ Year Treasury Bond ETF(TLT)$
United States Inflation Rate
It might reaches a 0.35% MoM increase in core CPI (consensus 0.3%, previous 0.28%), and a 0.31% MoM increase in nominal CPI (consensus 0.2%, previous 0.10%).
Correspondingly, the nominal CPI YoY is expected to rise from 3.1% to 3.3%, and the core CPI YoY is expected to be in the range of 3.9% to 4.0%.
It is likely a rebound in both MOM and YOY nominal CPI to be mainly influenced by the narrowing of the decline in energy prices in December.
Core inflation is expected to be relatively strong due to several factors:
1) Market rent and market house prices, indicates that rental inflation in the US may still be relatively high in December, dragging down the progress of inflation improvement.
2) Recent US labor market remains relatively healthy, with the slowdown in wage growth potentially delaying the improvement in "other core services" inflation.
3) Unexpected decline in "other core goods" in November mainly reflects random disturbances in the data, lacking sustainability, and the decline in December may narrow.
Well, at the same time, US CPI inflation still return to a downward trend in the next 1-2 months, and the risk of "second inflation" has not been observed in the data.
Looking ahead, high inflation this month may only be a temporary fluctuation. The overall trend of US inflation continues to improve, and the year-on-year CPI growth rate in 2024 may run at 2%-3%, basically reaching the target level of the Federal Reserve's policy.
In terms of key components
1) Rent inflation may continue to decline. The fluctuation of rent inflation in 2023 was large, with significant rebounds in individual months, partly due to the sample rotation effect of rent CPI. The US Bureau of Labor Statistics uses 6 sub-samples to calculate rent CPI in rotation, with different sub-samples showing different rent inflation rates. After excluding the sample rotation effect, the fluctuation of rent inflation decreased, and a more obvious downward trend was observed, with no longer resilient inflation.
2) Used car prices may significantly decline in January, leading to a noticeable cooling of commodity inflation. Wholesale prices of used cars significantly cooled down in December, and there is a high probability that this will be transmitted to retail prices in the coming months. The easing of supply chain pressure, coupled with the simultaneous increase in car production and inventory, also contributes to the decline in car prices.
3) Other core service inflation may continue to improve. Other core service inflation is closely related to the supply and demand relationship in the labor market. Although the labor market is still strong at present, leading indicators are signaling a cooling down. The ISM non-manufacturing index unexpectedly dropped to 50.6 in December, indicating that the most stubborn service sector inflation may gradually improve.
The results of the Job Openings and Labor Turnover Survey (JOLTS) released by the US Bureau of Labor Statistics show that the number of job vacancies in November 2023 was 8.79 million, the lowest level since April 2021, lower than the market's expected 8.85 million. Vacancies in transportation and warehousing, government, business services, and leisure and hospitality industries have significantly decreased, further confirming that demand in the service sector is cooling down.
United States Non Farm Payrolls
The reduction in job vacancies, the narrowing of the labor market supply-demand gap, and the decline in the hiring difficulty index are favorable for the improvement of wages and core service inflation.
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