Name: Rising Prices and Inflation Highlight the CPI Report: What Will the Fed Do Next?
Uploaded: 2024-01-11T15:40:00Z
Duration: 16 min 21 s
Description: The latest inflation data suggests prices are not continuing to fall as they had in late 2023. WSJ’s Dion Rabouin explains how that could play a big role in determining the Fed’s path in 2024. Photo: Mandel Ngan/AFP/Getty Images

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The latest inflation data suggests prices are not continuing to fall as they had in late 2023. WSJ’s Dion Rabouin explains how that could play a big role in determining the Fed’s path in 2024. Photo: Mandel Ngan/AFP/Getty Images

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Rising Prices and Inflation Highlight the CPI Report: What Will the Fed Do Next?

Welcome, welcome into "Market Takes." I know you could have been anywhere in the world, but you're here with me. I appreciate that. I'm Dion Rabouin, reporter at the Wall Street Journal. Today we are breaking down the latest CPI, the consumer price index. Inflation. What's going on? Well, inflation picked up a little bit last month. We are gonna explain what happened, dig into the core, the causes, talk about everything that's going on with inflation prices, all that. We're gonna talk about what the report showed. The CPI report out this morning really I think was unexpected, a little bit higher than expectations. We're gonna talk about how and we're gonna talk about those expectations, and why this report was a little bit hotter than what economists had expected. We're gonna give you the major takeaways from this report. Talk about how it aligns with the longer term or even more recent term trends that we've seen from inflation. Of course, we're gonna take a look at the market, talk about what's going on with stocks, bonds. We're gonna take a look at crypto this morning, talk about commodities. Really all the reactions we're seeing across the board to this report. We're gonna talk about how this influences the Fed, the Federal Reserve, how they're gonna react to this and how basically what they've said comes in line or aligns with this report. Of course, we're gonna talk about the big takeaways and what comes next, because here at "Market Takes" we are always looking forward, even though it is backward-looking data. So let's get into it right now. Let's talk about the report. I wanna put a chart up here on your screen so you can see just what we're looking at. CPI, now this chart goes back to January of 2021, and we'd seen CPI, of course, inflation rose, see that high of over 9% there in the summer of 2022. And then from then through 2023, we see inflation moving in just one direction, that's down. Late in the year in 2023, you see it start to kind of pick back up, but then you see it come down again. But what we see at the end of 2023, in December, this report, we see inflation pick back up to 3.4%. Inflation actually month-over-month rose 0.3%, a little bit more than expected. It was expected to be 3.2%. So what economists were predicting was that trend to continue moving lower, actually maybe move a little higher than November, but actually we moved quite a bit higher or not quite a bit higher, I should say, a little more than expected. 3.4% versus November's 3.1%, expectations of 3.2%. All that is to say inflation's a little bit higher, a little bit hotter than what economists had predicted, and that's what we see in this chart. And really this just illustrates that inflation had been moving lower consistently. Now we're at that phase where, okay, it might be coming back up, might be picking up a little bit, going back down, but we seem to be staying around this 3, 3,5% range. And that seems to be the theme. Let's take a look at core inflation, core CPI. Throw that chart up here on your screen. Now core prices are when you exclude food and energy. So you take food and energy out because those can be very volatile. They can move up and down a lot in a month. So taking those out, you see inflation has continued to kind of move back lower, but that's around the 4% level. And again, the Fed wants inflation at 2%. The Fed doesn't want 3% inflation, not 2.5. The Fed wants to consistently see a trend of 2% inflation. And what we are seeing is that inflation has been a little bit more sticky, and core inflation you see it kind of moving very strongly back down again since the summer of 2022. And now we're kind of getting stuck around 4% on the core side, this month showing 3.9%, right along with inflations or expectations, excuse me, had been for 3.8% year-over-year. Month-over-month core prices rose 0.3%. That was right aligned with the expectations from economists. So again, this charge is illustrating overall trend moving lower, but we seem to be kinda running out of steam in terms of getting inflation back down to the Fed's 2% target. And the Fed watches that core number because they say that's more predictive of where inflation's really going. It's more telling of the things the Fed can control, of the things the Fed can influence. And listen, if you watch "Market Takes," if you watch the economy, if you watch the markets at all, you know it's all about the Fed. What the Fed does is really what's going to move markets. And when we got that big rally in the stock market towards the end of the year, that was all based on these expectations for inflation to keep coming down, for the Fed to start lowering rates this year as soon as their second meeting of the year. This report shows that there's a little bit of uncertainty about that now, there's a little bit of, well, maybe inflation's not coming down and maybe inflation's not coming down as fast as, you know, folks in the market had predicted, and maybe there could be a few more bumps in the road going forward. So let's talk about the major takeaways from this report and what we're seeing. The big takeaway for me when I read through this report, when I look at the numbers, it's that this narrative of inflation just falling back down to the Fed's 2% target, that's being challenged. There's big questions about that. CPI showing 3.4% inflation in December. That actually goes against what we saw from the PCE report, which is the Fed's favored gauge of inflation. Now, what the Fed wants is 2%. If CPI is showing 3, 3,5 consistently, it's staying above 3%, it means we're not getting to that 2% inflation target, and it means the Fed really won't feel comfortable based on what they've said in lowering and cutting rates. So we've got real rates holding high, holding about 2%, but as inflation picks back up, those real rates come down, and then the Fed doesn't have that momentum to cut rates. And let's not forget, there are some real hawks on the Fed, folks who want to keep rates high, who are very, very worried about inflation. We'll talk about all that in just a minute. But the big theme, the big theme of this report is that inflation, the narrative that inflation is just gonna come right back down really smoothly, really quickly to the Fed's 2% target, that's being challenged. The market is reacting accordingly. We will talk about that that in just a sec. But this report is going to put a magnifying glass on all the future measures of inflation, more realtime things, like gas prices, grocery prices, rent prices, restaurant prices, all those realtime indicators that folks can watch. There's gonna be more of a magnifying glass on, okay, are those prices coming back down? The big question here is does this continue? Does inflation stay stuck around 3, 3.5%? Or does it start moving back up again towards 4%? Because that again is going to challenge the big picture narrative. Economists, money managers, investors had all been betting that the Fed was gonna cut rates this year and that was gonna lead to some real outperformance for the stock market, and the stock market was gonna gain maybe not as much as last year, the S&P rising a little over 24% in 2023, but for the Fed to cut rates and for that to lead to a big boost for the market, see stock prices rising higher, if inflation doesn't cooperate, we don't get that, and that's what this is all about. Now, at the Fed's last press conference, you saw Fed Chair Jerome Powell talk about, well, you know there had been a lot of talk about getting inflation back down from 3% to 2%. That's gonna be the hardest part. I don't see it. Well, he might be seeing it now. We're seeing inflation on CPI actually not only not fall, but rise higher. That's big. And so that could be momentous, and we will hear from the Fed at the end of this month. We'll be right here on "Market Takes" breaking it down for you. So it's gonna be very interesting. And we've still got a little bit of time before we get to that Fed blackout period, which is two weeks before their meeting on January 31st. So we could be hearing from some Fed officials, and that could really move the market. You're gonna wanna watch out for that. Shelter prices, that's housing, all that, those continue to rise, contrasting a lot of the real time data we've seen on rents. So what we could be seeing in CPI is that even though overall rents are slowing down and those price increases are declining, what people are paying for their housing overall because home prices keep rising, that's keeping that high. And economists have been predicting for months, and months, and months that this shelter component was going to come down in a meaningful way, that we're going to start seeing lower shelter prices, and that's gonna really take the bottom out from inflation and start to move inflation lower. We have not seen that. And in fact, shelter prices up 0.5%, that contributed to half of the overall increase in CPI. Another thing to watch is energy. Year-over-year energy is actually pulling the index lower. So you're seeing negative numbers from the energy component. So overall energy prices are lower than they were a year ago, but month-over-month what we've seen is those energy prices start to creep up. That's gas, that's oil, that's utilities, all those things in the energy index, in recent months those have started to pick back up, up 0.4% month-over-month. This month from November, we have seen consistently things like motor oil and gasoline, which had been down 5 or 6% over the last few months, are starting to pick back up and starting to move positively. Again, it's one month. That one month the trend does not make, but that is something worth watching because the price of energy, the price of oil, all those things had been pulling inflation lower, now they're starting to push inflation higher. You're gonna wanna watch that. Listen, the big picture takeaway here is: don't sleep. Alright, let's check out now and let's talk about what's going on in the market. So I wanna throw a chart up here on your screen from wsj.com. What you're seeing there are the three major indexes. You see we are negative on all three for the day. Initially, you had the market kind of start out higher and then I think really investors started to parse and look through this CPI report and say, "Uh oh, this isn't good." So you're seeing the Dow, the S&P, the NASDAQ, all lower. The NASDAQ actually holding up pretty well and actually looking like it's kind of picking back up. Big story here. Let's take a look at the bond market 'cause that's what it's really all about. Wanna throw here, check out what you have the move from the 30-year bond, and that's long-term inflation expectations. That's what that's all about. As soon as the report was released, boom, you just see this kind of number of the yield on the 30-year pickup jump like a rocket ship. Then it came back down as folks started buying bonds saying, okay, maybe this is overdone. Now you're starting to see that pick back up again. And you're seeing a similar trend here from the 10-year yield, the most traded yield or the most traded US Treasury note out there, that's coming, it was way up, now it's coming back down. Investors not entirely sure what to make of this. Check out here. The euro, you're seeing the euro down, which means the dollar's up. Overall, the US dollar index, again, you see a similar trend, right, jumps up after that report comes out, that's right here. You just see a big jump. Then it came back down, and now we're seeing it pick back up again. You could see that momentum really reach and kind of continue on for those things like bond yields and the dollar moving higher as more folks start to read deep into this report. These initial reactions, they really come just headline, the algorithmic trading machines that folks have. Just kind of make a move. Oh, CPI is higher. Boom, sell off bonds, buy the dollar. Then investors came in and said, "Ah, I don't know about this." And as they really read through the data, I think they're seeing, alright, wait, this might be inflationary, this might mean rates are gonna stay high for a while. Let's buy the dollar. Let's sell bonds. That moves those yield prices higher. Really quick wanna talk about crypto because Bitcoin is the big story of the day. SEC giving approval for those Bitcoin ETFs. Think we've got 10 being approved. And you see just a lot of bullish momentum across the board. You're seeing green, green, green. Bitcoin cash up about 11%, almost 12%. You got Ethereum Classic up over 30%. Big moves in the crypto market. You thought, I would've thought you might see a little buy the rumor, sell the news here, but over the past five days as the rumor of this crypto ETF or this Bitcoin ETF being approved was coming in, you really have seen some strong momentum. Bitcoin could be moving back towards 50,000. Definitely something to watch there. On the commodity space, we're seeing oil higher. Again, we talked about it. This is an oil story, it's an energy story. We are seeing oil prices continue to move higher. That's something you'll also want to keep your eye on. And again, what we're seeing in markets, just really illustrating right now, the way investors are responding, the way investors are thinking about how these things and the effects of this inflation report could move the market. Let's talk really quickly about how this could move the Fed. Again, at the December meeting Fed Chair Jerome Powell said that he did not push back on those expectations for rate cuts. The market is priced in a rate cut at March, that's the Fed's second meeting of the year. Fed Chair Powell in December didn't push back on that. He didn't say, "Hey, listen, we're not doing that. It's absolutely not happening." And the market took that as a sign of, okay, it is happening. So those rates, even after this report was published, even after we got the CPI report, investors still betting on some rate cuts as soon as March, but the bets have come back down a little bit. You're not seeing as much certainty about it as you were. Really investors have been pricing in about a 70, 75% chance we get a rate cut in March. Now it's about a 65, 66% chance. But investors still betting a rate cut is coming in March and still betting we're gonna get six rate cuts by the end of this year. That's a significant change in Fed policy, and that's what investors are seeing. We will hear whether or not Fed officials come back and push on that narrative in the coming weeks. The latest FOMC meeting minutes though did push back on that and we're gonna have to hear from some folks and, again, we'll have that meeting January 31st. We'll be right here breaking it down for you on "Market Takes." Big question as we look forward is: how committed is the Fed to the 2% target? If you hear Fed Chair Jerome Powell come out and bang on the table, say, "We are committed. We must have 2% inflation. Nothing else will do." That could have a real impact on markets. So he's not actually gonna do that. He's not gonna bang on any tables. What I mean is in his way, right, if you hear some of those things, if he's talking really emphasizing the 2% target, that's gonna be a sign to markets, uh oh, maybe this narrative is in question. If they're really committed, that means rates need to stay high. That could push down markets, push down stock prices, and that could be a real hurdle for markets to get over. If they're not as committed, if they start to say, "Well, you know, 2%. Ah, you know, it's getting there. We're in the right, we're going in the right direction. Things are looking alright." Well, that could add some more bullish momentum to stock prices, other risk assets, things like Bitcoin, like cryptocurrency that really thrive on risk. So what's next? Listen, big questions on things like real average earnings. I want to throw up one last chart here on your screen and that's wages. And this is the Atlanta Fed's Wage Growth Tracker. And what we have seen is wages go up in a major way in 2021, 2022, and then come down in a major way in 2023. And what we've seen is that trend kind of petering off as we got toward the end of the year, and for four straight months now wage growth has been at 5.2% according to the Wage Growth Tracker. All that means is wages aren't picking back up. They're not rising. But they're not coming back down either. What the Fed wants to see is those wages around 3 or 4% because Fed Chair Jerome Powell said that's more in line with inflation overall at 3 or at 2%, excuse me. Wage growth around 3% means inflation around 2%. Well, wages are holding around 5.2%. What's the next step? We haven't taken that yet. And again, when this CPI report came out, we got the latest update to the Wage Growth Tracker, once again at 5.2%. So that really just illustrating that wages are staying pretty stagnant. They're not moving up, they're not moving down. And that's gonna have a big effect on inflation as well. Employers are cutting hours. We've seen that consistently. But the hours haven't gone down below that 34.3, which is around the long-term trend. If it falls below 34, that's gonna be a big market 'cause that is a huge long-term recession indicator. You want to keep your eyes on that. So what comes next? PPI, the producer price index, which is what businesses are paying for prices, that comes out tomorrow. We will get retail sales report on Tuesday, January 17th. "Market Takes" is gonna be back to talk you through the fourth quarter GDP report on January 21st, January 25th, excuse me. January 25th, we'll be breaking down fourth quarter GDP report. And for more, check out my podcast "WSJ's Take on the Week." We cut through the noise to explain the major business and financial news that moves markets. Also, you can make smarter investing decisions. Subscribe wherever you get your podcasts. That's gonna do it for us here on "Market Takes." Thanks so much for tuning in. I'm Dionne Rabouin, reporter for the Wall Street Journal. We will see you when we do it again next time.