Powell Faces Challenge With CPI, Jobs Data

Article originally posted on Globe St. on January 16, 2025

Federal Reserve chair Jerome Powell no doubt had started to relax about the economy — but now everything has changed. That’s because the Consumer Price Index for December increased over the last 12 months to 2.9%, making the third month in a row it has jumped. Core inflation (excluding food and energy prices) was up 3.2%.

Combined with last week’s release of the job numbers, it makes it more difficult for the Federal Reserve to consider another rate cut. The result is continued low-level economic uncertainty.

Energy price increases accounted for more than 40% of the all-items increase, climbing 2.6% month-over-month after a 0.2% increase in November. Shelter was up 4.6% in the last 12 months, the smallest 12-month increase since January 2022.

“On the surface, this report is a mixed bag with an increase in headline CPI, both month-over-month (0.4% vs 0.3%) and year-over-year (2.9%), however, looking at the core numbers, which the Fed and other economists believe are a more consistent, “true” measure of underlying inflation, we saw a reduction in month-over-month (0.2% vs 0.3%) and year-over-year (3.2% vs 3.3%) inflation,” wrote Chris Zaccarelli, chief investment officer for Northlight Asset Management, in prepared comments sent to GlobeSt.com.

“Core Inflation isn’t accelerating and that’s the story,” Jamie Cox, managing partner for Harris Financial Group, wrote in an email. “The market may have had its hair on fire about inflation running away again, but the data does not support that conclusion. What we are seeing is the typical ebb and flow of the data as inflation is being pushed out of the system.”

But, as Steven Blitz, managing director of global macro and chief U.S. economists at GlobalData TS Lombard wrote, the December CPI number “gives markets a breather, not a change to run with.”

More important is how this fits in as part of a growing pattern. CPI isn’t enough to move the Fed, which still prefers PCE or personal consumption expenditures, with the two measures differing and potentially leading to different conclusions.

The December jobs number of 256,000 was significantly ahead of estimates that called for 155,000, suggesting a much stronger labor market than expected.

If jobs are strong — and this was only one month, so might be an anomaly — there is less reason for the Fed to reduce interest rates because employment isn’t in peril.

Understanding what happens this year will take time.

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