In recent weeks, the financial markets have been watching closely as the latest inflation data from the United States has surfaced, igniting discussions and analyses across the globeThe implications of this data reach far beyond the immediate figures; they serve as critical indicators for investors and economists striving to gauge the trajectory of the American economyThe newly released figures for December 2024 exhibited a core Consumer Price Index (CPI) increase of just 0.2% on a month-over-month basis, a result that fell short of the anticipated 0.3%. This reading marked a notable drop from a consistent 0.3% over the preceding four monthsComparatively, the year-over-year core CPI stood at 3.2%, down from 3.3% during the prior three monthsWhile the latest core CPI numbers were comforting, a more granular examination of the underlying CPI structure unveiled a pronounced divergence within its components, with certain segments like energy and transportation services presenting elevated month-on-month figures, while housing and transportation services lagged significantly on a year-over-year basisSuch a complex inflationary landscape fosters uncertainty regarding the future trajectory of inflation in the United States.

Overall, this recent inflation data has, to some extent, eased the previously escalating concerns of "tightening panic" within financial circles

Advertisements

The prevailing fear surrounding persistently high inflation and the Federal Reserve's ongoing tight monetary policy had prompted a wave of anxiety among investorsHowever, the subpar core CPI performance rekindled hopes that inflation could be coolingYet, the current data fails to furnish sufficient evidence to convince both the Federal Reserve and investors that inflation would smoothly subside by 2025. To attain a more accurate assessment of the inflation landscape in the United States and its potential future direction, it becomes paramount to take a historical view over a more extended timeline.

Reflecting upon the events of 2024, it is evident that both CPI and core CPI exhibited a clear trajectory of declineHowever, while the trend appears straightforward at first glance, a deeper look into the core CPI reveals an ebbing process that lacked the smoothness one might expectEarly in the first quarter of 2024, CPI and core CPI experienced significant upward movements that caught many by surprise, rendering apprehensions regarding inflationary pressures on the US economy unavoidableFortunately, the second quarter witnessed a swift and significant retreat in inflation rates, effectively compensating for the earlier disruptions and providing a degree of relief to the marketsAs we progressed into the latter part of the year, inflation dynamics seemed to stabilize in a relatively neutral state.

Digging deeper into the CPI composition, two significant comparisons stand out that can enhance our understanding of the evolving inflation context in the United StatesFirst, comparing the figures from December 2024 with those of December 2023 reveals a downward adjustment in the year-on-year growth rate of many key components

Advertisements

This suggests that some progress in curbing inflation has indeed been achieved over the past yearYet, juxtaposing December 2024 with December 2019 data illustrates a more alarming picture—many segments remain elevated above pre-pandemic levels, most notably in housing and transportation servicesData indicates that these two categories' contributions to the CPI year-on-year figures were higher by 0.51 and 0.44 percentage points, respectively, resulting in nearly a cumulative impact of 1 percentage pointThis insight underscores a pivotal acknowledgment: should these components revert to their 2019 levels, while all other sectors remain unchanged, the US CPI inflation rate could effortlessly return to the targeted 2% benchmarkConsequently, when forecasting the evolution of CPI in the United States, a sharper focus must turn towards the movements within these two significant sectors.

As we project into 2025, assessing the future trajectory of inflation in the United States requires a systematic approach from both aggregate and structural perspectivesOn the aggregate front, there are signs that wage growth and (real) service consumption year-on-year growth rates have retreated from previous highs, creating an environment conducive to easing core service inflationSlower wage growth signifies that pressure on labor costs for businesses is lessening, whereas a decline in the year-on-year growth rate of actual service consumption indicates a cooling demand, both contributing towards alleviating the pressures stemming from core service inflationHowever, vigilance is necessary regarding the potential risks emerging from tightened immigration policiesAs these policies become stricter, the US labor market might grapple with shortages, putting upward pressure on service costs and counteracting efforts to lower core service inflation.

On a structural level, a detailed examination of varied subsets is essential

Advertisements

Concerning housing, it has been identified that CPI housing data tends to lag behind shifts in housing prices and market rentsAlthough current housing prices appear stubborn with no discernible downward trend, market rents have begun to stabilizeThis condition suggests that CPI housing inflation is likely to benefit from the stabilization of market rents, potentially resulting in improved outcomes for housing inflation metricsThe stability in market rents is likely to contribute towards lowering residential costs, thereby casting a positive influence on the housing component of the CPI data.

When it comes to transportation services, there is a consistent lag associated with the growth rate of vehicle insurance costs, which remains behind the increases of vehicle prices and labor costsWhile this has led to persistent elevation in transportation service inflation figures in the short term, one could argue that this also signifies potential room for easing in future vehicle insurance costsOver time, there is optimism that vehicle insurance expenses will gradually align with vehicle prices and labor costs, facilitating a downward shift in inflation metricsNevertheless, we must remain cautious of the high labor cost factor, which could significantly impede the pace at which vehicle insurance and transportation service inflation decrease.

As for the energy sector, taking into account the global supply-demand landscape, geopolitical factors, and other elements, the likelihood of a drastic increase in energy prices through 2025 appears to be minimalThe advancement and integration of renewable energy initiatives have resulted in a slowdown in global demand for traditional energy resources

Advertisements

Advertisements