At first glance, inflation turned out to be hot, and indeed there is nothing in the data that could accelerate rate cuts, but there is also nothing that could reduce the scale of rate cuts this year. Similarly, the first market reaction was negative, but by the end of the session everything generally returned to the levels before the data were published.
When analyzing inflation, it is important not only to look at the year-to-year change (this is history, but the market reacts to it anyway), but also at the change in inflation over shorter periods, e.g. over the last 3 months. Figure 1 shows both the 3-month change (Y-axis) and the year-to-year change (X-axis) on one graph. Since Energy is a bit off the scale, Figure 2 shows the same series without Energy (for the last 5 months).
While the 3-month change in the headline inflation quickly dropped from 4.88% (September) to only 1.79% in December - the annual change does not want to go towards 2% and has not managed to break down below 3% so far.
In the case of core inflation, we have even seen an increase in recent months on a 3-month basis (from 2.41% rate to 3.33% - despite a decline in the annual dynamics from 4.39% to 3.90%). It is clear that Core and Food inflation are quite sticky.
Yet, in the case of core inflation, we can count on strong base effects from May 2024 (May 2023 will drop from the annual dynamics (+0.44%), and in June 2023 core inflation amounted to only 0.16% and also 0.16% in July 2023 – see Figure 3, lowest panel).
Base effects in the case of Food will support us from February 2024 (the +0.39% Feb-2023 print will fall out of the annual dynamics, and in March 2023 Food inflation amounted to only 0.01%, and 0.02% in April 2023 - see Figure 3.
All in all, core inflation may be much closer to the Fed's target by mid-year.
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