Breaking: US CPI inflation climbs to 3.4% in December vs. 3.2% expected

Inflation in the US, as measured by the change in the Consumer Price Index (CPI), rose to 3.4% on a yearly basis in December, the US Bureau of Labor Statistics (BLS) reported on Thursday. This reading followed the 3.1% increase recorded in November and came in stronger than the market expectation of 3.2%. On a monthly basis, the CPI rose 0.3%, compared to analysts' forecast of 0.2%.

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The Core CPI, which excludes volatile food and energy prices, rose 0.3% on a monthly basis as anticipated. The annual Core CPI increased 3.9% in this period, down from 4% in November.

"The index for shelter continued to rise in December, contributing over half of the monthly all items increase," the BLS noted in its press release. "The energy index rose 0.4% over the month as increases in the electricity index and the gasoline index more than offset a decrease in the natural gas index. The food index increased 0.2% in December, as it did in November. The index for food at home increased 0.1% over the month and the index for food away from home rose 0.3%." 

Market reaction to US Consumer Price Index data

The US Dollar gathered strength against its rivals with the immediate reaction to inflation figures. At the time of press, the US Dollar Index was up 0.05% on the day at 102.40.

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This section below was published as a preview of the US December inflation report at 03:00 GMT.

• The US Consumer Price Index is set to rise 3.2% YoY in December, up from November’s 3.1% increase.
• Annual Core CPI inflation is expected to edge lower to 3.8% in December.
• The US Dollar’s fate hinges on the CPI data amid dovish Fed expectations.

The high-impact US Consumer Price Index (CPI) inflation data for December will be published by the Bureau of Labor Statistics (BLS) on Thursday at 13:30 GMT. Inflation data could alter the market’s pricing of the Federal Reserve (Fed) interest rate cuts later this year, fuelling extreme volatility around the US Dollar (USD).

What to expect in the next CPI data report?

The US Consumer Price Index is forecast to rise at an annual pace of 3.2% in December, a tad quicker than the 3.1% increase reported in November. The Core CPI inflation, which excludes volatile food and energy prices, is set to fall to 3.8% in the same period, compared with the previous growth of 4.0%.

The monthly CPI and the Core CPI are seen increasing 0.2% and 0.3%, respectively.

In November, the US CPI numbers came in line with the market expectations, but the details of the report showed an uptick in the shelter index and used car and trucks index, which helped push back against the market’s pricing of Fed rate cuts next year.

Used car prices dropped 0.5% in December, dragging the Manheim Used Vehicle Index down 7.0% year-over-year (YoY), the monthly market report published by the auction house Manheim showed Tuesday.

Previewing the US December inflation report, “our forecasts for the December CPI report suggest core inflation slowed notably: we are projecting a “strong” 0.1% increase, notably down from 0.3% m/m in the last report,” said TD Securities analysts.

“Despite that, we look for strengthening in the headline to 0.2% m/m, as inflation won't be aided by falling energy prices this time around. In the details, the report is likely to show that the goods segment remained an important drag on core inflation, while the shelter components are expected to remain sticky,” the analysts added.

Meanwhile, the Prices Paid Index of the ISM Services PMI survey edged slightly lower to 57.4 in December from 58.3 a month earlier. The Prices Paid Index of the Manufacturing PMI dropped to 45.2 in December from 49.9 in November. These readings portrayed the continued softening of price pressures in the services sector, and signaled sharper price declines in the manufacturing industry. 

As Fed officials maintained their data-dependent stance on monetary policy, the US CPI inflation data holds the key to gauging the timing and the pace of the Fed rate cuts, which could significantly influence the value of the US Dollar. The details of the report could also highlight the sticky parts of inflation.

Heading into the US CPI showdown, the CME Group FedWatch Tool shows that markets are pricing in a 66% probability of the Fed announcing rate cuts as early as March. “The Bloomberg's World Interest Rate Probability (WIRP) function suggests 5% odds of a cut on January 31 and rising to nearly 75% for the March 20 meeting after being nearly priced in at the start of last week. Five rate cuts are priced in vs. six at the start of last week, though there are still 50% odds of a sixth cut,” analysts at BBH noted.

How could the US Consumer Price Index report affect EUR/USD?

Although the annual CPI and Core CPI figures are widely cited by the media, the monthly inflation data, especially the Core CPI, is likely to stir markets.

A monthly core inflation reading of 0.3% or higher could prompt investors to dial down their bets on March Fed rate cuts, offering a fresh boost to the US Dollar. On the other hand, a softer-than-expected Core CPI print could trigger a broad USD sell-off, as it would reverberate Fed rate cut expectations in the first quarter of 2024.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for EUR/USD and explains: “The pair is consolidating Friday’s volatile trading action at around the 1.0900 level heading into the inflation data release on Thursday. The 14-day Relative Strength Index (RSI) indicator is trading listlessly at the midline, suggesting a lack of clear directional bias at the time of writing.”

On the upside, stiff resistance aligns at the 21-day Simple Moving Average (SMA) at 1.0975, above which the EUR/USD pair needs to find acceptance at the 1.1000 round level. The next relevant topside barrier is seen at the January 2 high of 1.1046. 

Alternatively, a sustained move below the 50-day SMA of 1.0885 will threaten the horizontal 200-day SMA at 1.0847. A test of the 100-day SMA at 1.0764 cannot be ruled out if the above healthy support levels give way.”