The first U.S. inflation report of the year is landing later this morning. At stake is how much it will nudge the Federal Reserve to start cutting interest rates. Here’s what you need to know about today’s consumer price index reading for December. What economists are expecting and watching — The general forecast is a continuing story of moderation — one that a number of economists expect could lead to the Fed reaching its 2 percent inflation target (though it’s technically a different inflation measure, PCE) by the end of the year. Economists surveyed by the Wall Street Journal expect that December's headline CPI — overall consumer prices — rose by 3.2 percent from a year earlier, a slight uptick from the 3.1 percent growth seen in November. Excluding food and energy, core CPI is expected to show 3.8 percent growth from a year earlier, down from 4 percent in November. One metric that will be getting special attention in this report is the extent to which housing — as well as services in general — continues to drive inflation. “The thing still keeping CPI high is primarily those housing services,” said Jonathan Fisher, interim chief economist at the Washington Center for Equitable Growth. Why it matters — The report has the potential to shift expectations around how soon the Fed will cut rates. Hotter-than-expected inflation could push the Fed to take more time, whereas a surprise deceleration could draw the decision forward. The Fed has indicated it will begin lowering rates this year but hasn’t been specific about when. Inflation at the moment is the big factor opening the door for rate cuts, with jobs and wage growth in December turning out to be unexpectedly strong. The Fed has been trying to tamp down Wall Street’s unrelenting belief that cuts are coming soon. “There's a sense the Fed will be pivoting very rapidly and very aggressively, and that stands in contrast with the Fed’s messaging, which has been and continues to be it will not be easing monetary policy rapidly until there is ample evidence that inflation is moving sustainably — and sustainably is the important word here — toward 2 percent,” EY-Parthenon chief economist Gregory Daco said. Factors that could drive inflation this year include home and car insurance as well as health care, according to Daco. But he said he’s leaning optimistic. “Even though this print is likely to be on the more moderate and hotter side, I would anticipate that in early ‘24 we'll see some further softening in inflation and further disinflation,” he said. How voters and business leaders see it — Most voters continue to disapprove of President Joe Biden’s handling of inflation and prices, per the latest Economist/YouGov poll conducted this month. According to Conference Board survey results released Wednesday, U.S. CEOs rank inflation as their No. 2 external concern this year, after a potential recession. Most say their companies aren’t prepared to navigate high inflation. Happy Thursday – Ready to preview your Basel III Endgame comment letter? We’d love to cover in MM. Reach out to zwarmbrodt@politico.com.
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