Market Extra

Why Thursday’s U.S. CPI report might kill stock market’s hope of inflation melting away

Last Updated: Jan. 11, 2023 at 1:01 p.m. ET
First Published: Jan. 11, 2023 at 9:57 a.m. ET
By Isabel Wang

A mild stock market rally to kick off the new year will be put to the test Thursday when investors face a highly-awaited U.S. inflation reading which could well help determine the size of the Federal Reserve’s next interest-rate increase.

The December CPI reading from the Bureau of Labor Statistics, which tracks changes in the prices paid by consumers for goods and services, is expected to show a 6.5% rise from a year earlier, slowing from a 7.1% year-over-year rise seen in the previous month, according to a survey of economists by Dow Jones. The core price measure that strips out volatile food and fuel costs, is expected to rise 0.3% from November, or 5.7% year over year.

The December CPI will be particularly important for influencing the Fed’s decision in its upcoming meeting which concludes February 1, said economists at Pimco. They expect the inflation and labor market data will have moderated sufficiently will push the central bank to pause rate hikes before their May meeting. ... “After hiking 50 basis points at the December meeting, we expect the Fed moves to a 25bp hiking pace in early February, and ultimately pause around 5%,” wrote Pimco’s economists Tiffany Wilding and Allison Boxer, in a Tuesday note.

However, since the Fed’s December meeting, officials have relentlessly signaled the central bank will need to raise interest rates above 5% in order to get inflation to the 2% target, with no interest rate cuts expected this year. Fed funds futures traders now see a 78% likelihood of a 25 basis point hike at its February meeting, and a 68% chance of another in March, which would bring the terminal rate to merely 4.75-5% by mid-year, according to the CME FedWatch tool.

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