US Inflation Rate Rises to 3.4%, US Dollar Climbs Higher

US inflation for December, which was released on Thursday, rose to 3.4%. This was higher than expected and the US Dollar has responded with gains.

The US consumer price index (CPI) climbed 3.4% year-on-year in December, up from 3.1% in November and above the market estimate of 3.2%. The surprise jump in CPI was driven by energy and food prices, which fell at a slower pace in December than a month earlier.

Core CPI, which excludes food and energy and is considered a more reliable gauge of inflation trends, dipped to 3.9% in December, lower than the 4.0% gain in November and the market estimate of 3.9%.

On a monthly basis, CPI rose to 0.3%, up from 0.1% in November and above the market estimate of 0.2%. Core CPI was unchanged at 0.3% and matched the market estimate.

The Federal Reserve pays more attention to Core CPI the headline release and will be encouraged by the decline to 3.9%, which is the lowest level since May 2021. The Fed’s steep rate-tightening cycle has pushed inflation down significantly – just one year ago, inflation was running at a hot 6.5% clip and the Fed has chopped that in half.

At the same time, the battle to bring back inflation to the 2% target will be a challenge, as inflation is dropping more slowly than it was a year ago. Interest rates have very likely peaked, as the Fed signaled in December that it would lower rates in 2024. This was a significant pivot for the Fed, which for months had insisted that rates could go even higher if inflation reversed directions and moved higher. What the Fed has failed to do is provide a timeline for rate cuts, which has investors frustrated. The markets have priced in up to six rate cuts this year, with the initial rate cut expected in March.

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The US Dollar is higher against the major currencies on speculation that the Fed might delay rate cuts due to the rise in inflation. The US stock market has also posted gains following today’s inflation report. The EUR/USD and GBP/USD currency pairs both fell by 0.40% after the inflation report.

The US stock market has also responded with gains at the start of the Thursday session. The Nasdaq 100 Index is up 80.64 points (0.80%) at 16,873.38 and the S&P 500 Index is up 12.09 points (0.25%) at 4795.58.

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