The modest upward surprise in the December CPI report did not sway markets to revise their expectations of a Federal Reserve cut as early as March. The key monthly increase in core prices seems to have stabilised at a level of just below 4%, which is too high for comfort and seems to confirm that the ‘last mile’ of the fight against inflation will be tougher than markets expect.
By the end of the week, markets appeared to have almost completely forgotten about this upside beat, instead placing greater emphasis on the soft PPI inflation report, released on Friday. High-frequency labour market indicators continue to suggest little or no loosening, and the most reliable indicators suggest that wages are growing at an above 5% rate amid solid growth and very tight labour markets. We continue to expect that hopes of a March rate cut will be dashed, and therefore think the dollar will stay well supported against European currencies in the short-term.
