The US Inflation Drop Could Have Been Temporary.

If economists’ forecasts for Tuesday’s consumer price index are correct, the recent rise in US inflation will likely end in January. CPI is expected to rise 0.5% in December, which is the highest increase in three months. Core rate, which excludes food and energy, is 0.4% for the second consecutive month, after two readings below 0.3%.

Key Inflation Gauges to Follow Firm Gains

This would be the end of a string of disappointing developments in inflation:

• The largest increase in used car prices since 2021
• Since the beginning of the year, gasoline prices have risen again
• Friday’s release of CPI data benchmark revisions showed that core inflation, which excludes food or energy, was higher than originally estimated in the final months of 2022.
• Payrolls rose by more than expected in January, which is likely to continue the pressure on wages

All of this shows that the road to price stability will be difficult, as Reade Pickert reports.

There is a growing awareness that balloons are everywhere in our skies

Aneta Markowska is chief financial economist at Jefferies LLC. She stated, “If we have an unemployment rate that refuses to stop and inflation that’s beginning to accelerate, then that increases the likelihood that that Fed just keeps going.”

Any disappointment for the Federal Reserve would only reinforce the sense that policymakers are not done, and that financial markets misplaced expectations of a slower slowdown in inflation.

Some Fed watchers already had enough evidence to increase their estimates of the benchmark interest rate that Chair Jerome Powell (and his colleagues) will need to set, even before Tuesday’s report.

Barclays economists increased the June hike by 25 basis points to an outlook that already included quarter-point moves in May and March. This would increase the Fed’s target range to 5.25%-5.5%.

Morgan Stanley also added a quarter point increase to its May forecast, having added a March move a few days earlier.

The bottom line is that the Fed-watching community seems to be in flux about how much work is required to curb inflation. Tuesday’s CPI report may add fireworks to that mix.