Easing US Core Inflation Seen Reinforcing Fed Optimism

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(Bloomberg) — Underlying US price pressures probably continued to recede as 2023 drew to a close, backing up optimism at the Federal Reserve about the path for inflation.

The consumer price index excluding food and fuel, a measure favored by economists as a better indicator of underlying inflation, is seen increasing 3.8% in December from a year earlier.

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That would mark the smallest annual advance since May 2021, and illustrates the progress the Fed has made on squelching inflation that during 2022 clocked in at the fastest pace in 40 years.

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While price growth is still above the central bank’s goal, the latest readout from officials’ December meeting showed policymakers acknowledge that interest rates have likely peaked, along with a willingness to lower borrowing costs this year. 

At the same time, officials “reaffirmed that it would be appropriate for policy to remain at a restrictive stance for some time until inflation was clearly moving down sustainably,” according to the meeting minutes.

What Bloomberg Economics Says:

“We expect deflation in core-goods prices to continue weighing on headline and core — but if firms are successful in destocking inventory, that source of disinflation will abate in months ahead. Ultimately, core CPI inflation will likely prove sticky above the Fed’s 2% average inflation target through 2024, even as the pace of housing inflation slows.”

—Anna Wong, Stuart Paul, Eliza Winger and Estelle Ou, economists. For full preview, click here

The government’s CPI report on Thursday will be followed the next day by the producer price index. The measure of wholesale inflation, excluding food and energy, is also seen cooling on an annual basis.

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US central bankers speaking in the coming week include New York Fed President John Williams and the Atlanta Fed’s Raphael Bostic.

• For more, read Bloomberg Economics’ full Week Ahead for the US

Elsewhere, UK growth data, German industrial numbers, and central-bank decisions from South Korea to Peru will keep investors focused.

Click here for what happened last week, and below is our wrap of what’s coming up in the global economy.

Asia

The Asia-Pacific region gets its first rate decision of 2024 on Thursday when the Bank of Korea meets. 

Economists don’t expect a policy change in South Korea, with the focus falling instead on whether authorities retain their hawkish tilt even as the Fed slowly begins to lean the other way. 

The Bank of Japan gets some key statistics to parse. On Tuesday, Tokyo consumer prices, a leading indicator of the national trend, are forecast to show inflation slowing in December. 

Also that day, household spending probably fell again in November, and data a day later may show why: Pay gains are still lagging rises in the cost of living. 

Australia may see retail sales rebound in figures due on Tuesday, along with building approvals, while it gets inflation data on Wednesday and trade on Thursday. 

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China’s consumer and producer prices come Friday, as do India’s consumer inflation and industrial production data for December and November, respectively. Philippine trade data are due between Monday and Thursday.

• For more, read Bloomberg Economics’ full Week Ahead for Asia

Europe, Middle East, Africa

Manufacturing reports will draw the most attention in the euro zone in the coming week, as industrial data is released in its largest economies.

Most significantly, Germany, the biggest member of the euro zone, will release factory orders on Monday and production numbers on Tuesday. 

Both those measures are expected by economists to show small improvements in November from levels at or near the lowest in three years, during a quarter when most reckoned the country was in recession.

For the euro region as a whole, economic confidence on Monday and unemployment on Tuesday may draw the most attention. 

The European Central Bank tends to begin the year quietly and 2024 is no exception. Only a few appearances are scheduled, including French central bank chief Francois Villeroy de Galhau on Tuesday, Vice President Luis de Guindos and Executive Board member Isabel Schnabel on Wednesday, and ECB chief economist Philip Lane on Friday.

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Over in the UK, Bank of England Governor Andrew Bailey and colleagues testify to parliament on financial stability on Wednesday. Two days later, gross domestic product for November will be released, with a partial rebound expected by economists from October’s drop. 

Switzerland releases inflation numbers on Monday that may show a mild acceleration — though remaining comfortably below the 2% ceiling targeted by the Swiss National Bank for the seventh month in a row.

Three monetary decisions are scheduled in Eastern Europe:

• On Wednesday, Poland’s central bank is likely to extend a pause in rate cuts following the government’s plan to boost budget spending, and as inflation stays elevated.
• Serbian officials on Thursday may keep borrowing costs on hold as they await a return of price growth to their tolerance band.
• And on Friday, Romania’s central bank is also expected to leave rates steady, at 7%, as policymakers watch for resurgent inflation due to tax changes in the first part of 2024.

Hungary’s latest reading of consumer-price growth will be released the same day, with a slowdown to 5.9% anticipated by economists. That’s still faster than all but one member of the euro zone, neighboring Slovakia.

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Russia’s December inflation data will be published on Friday, with an outcome above 7% likely, markedly more than the 4% targeted by officials.

Turning to Africa, Ghana, the world’s second-largest cocoa producer, will probably reveal a fifth monthly slowdown in inflation on Wednesday, partly due to a relatively stable currency. 

The same day, investors will closely watch Egypt’s price data for December. While inflation has eased there from a record high, the cost of staple goods like sugar is rising sharply. A fresh round of price pressures is on the horizon after tariff hikes on key services from electricity to transport, and as the country prepares for another possible currency devaluation.

• For more, read Bloomberg Economics’ full Week Ahead for EMEA

Latin America

Five major Latin American economies report December consumer prices in the coming week, led by Chile on Monday. Economists expect monthly deflation to drag the full-year figure there as low as 4.4%, enough to keep the central bank’s easing cycle rolling.

In Mexico, inflation may have accelerated for a second month on the back of holiday-related spending, potentially keeping the hawkish bank on hold at 11.25% longer than previously expected.

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Colombian inflation may have slowed substantially to end 2023 nearly 400 basis points below the cycle peak, possibly putting a half-point rate cut in play at the central bank’s Jan. 31 meeting.

On Thursday in Brazil, economists surveyed by central bank look for annual inflation to have ended 2023 at 4.46%, well above the 3.25% target but within the 1.75%-to-4.75% target range after missing both in 2021 and 2022.

In Argentina, following through with President Javier Milei’s vow to give citizens the “uncomfortable truth,” the government’s chief spokesman said monthly inflation in December was likely to come in at about 30%, which would imply an annual year-end rate of 222%, up from 160% in November.

Rounding out the week, Peru’s central bank is all but certain to cut the key rate for a fifth straight meeting on Thursday, to 6.5%, as its finance minister expects inflation to end 2024 at 2% against 3.24% in 2023.

• For more, read Bloomberg Economics’ full Week Ahead for Latin America

—With assistance from Paul Abelsky, Brian Fowler, Robert Jameson, Laura Dhillon Kane, Piotr Skolimowski and Monique Vanek.

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