A third year in a row has begun with inflation on the rise as investors cling to delusions that the Federal Reserve does not actually care about the data. Both the “Summary of Economic Projections” and minutes from the last Fed meeting of 2023 indicated that the central bank only sees about three interest rate cuts in the back half of this year, yet Treasurys futures have priced in the expectation of twice as many, beginning as early as March. Now, the Bureau of Labor Statistics announced that consumer price index inflation is back on the rise for the first time since September, and once more, the markets seem more prone to projections than to honest predictions.
In the year ending this past December, CPI inflation rose by 3.4%, up from 3.1% in November. On a month-to-month basis, inflation tripled from 0.1% to 0.3% last month. The Fed’s preferred measure of core CPI, that is, the inflation rate without the volatile categories of food and energy, held constant with a 0.3% increase in December, or a 3.9% annualized rate.
While personal consumption expenditures and core PCE, another inflation measure used by the Fed, indicated that inflation is at about 3%, the final CPI print of 2023 would put inflation at nearly twice the Fed’s maximum benchmark of 2%. Mind you that unlike the PCE measures, which have consistently fallen since the near-double-digit inflation of summer 2022, CPI inflation bottomed out in summer 2023 and has increased consistently since then.
CLICK HERE TO READ MORE FROM THE WASHINGTON EXAMINER
The Fed has made two consistent promises to balance its hopes of pulling off a soft landing: first, that it would remain data dependent, and second, that it would remain committed to the 2% benchmark. Ironically enough, it was autumn’s epic bond rout that finished the work of the Fed’s rate hikes and allowed it to pause, and now, with the about-face from investors bringing the 10-year Treasury yield from 5% to south of 3% in the span of two months, the Fed is much less likely to cut, lest it abandon its mantra of higher for longer.
Inflation may no longer be accelerating the way it was two years ago, but with CPI back on the rise, it’s a third year in which the battle is far from over.