On January 15, the release of the U.Score inflation data for December sparked a significant response in the financial marketsInvestors seized upon the news that the core Consumer Price Index (CPI) had cooled, igniting hopes for potential interest rate cuts from the Federal ReserveAs a result, U.Sstock markets reacted positively, with the Dow Jones index rising by 1.65%, the S&P 500 by 1.83%, and the Nasdaq Composite climbing nearly 2.5%. Concurrently, treasury yields fell sharply, the dollar index exhibited fluctuations, and gold prices experienced a modest increase.

However, analysts caution that while the core inflation figures displayed some cooling, overall CPI trends remain upward due to rising energy pricesThe components of this data are particularly crucial, as oil prices play a significant role in future forecastingThe potential for continued increases in inflation cannot be overlooked, given that rents and transportation costs are still trending upward, and the reconstruction efforts stemming from the recent Los Angeles wildfires could further disrupt CPI figures.

The uncertainty surrounding the sustainability of the cooling inflation trend remains a concern

The overall CPI data indicated a year-on-year growth rise driven by energy prices, with the CPI rebound moving from 2.7% to 2.9%, marking its third consecutive month of increaseNotably, the seasonally adjusted increase in energy prices surged from a previous figure of 0.2% to a significant 2.6%, the highest rate since August 2023, contributing roughly 40% to the overall CPI increase.

Diving deeper into the specifics, gasoline prices adjusted for seasonal variation spiked by 4.4%, while electricity and natural gas costs also saw increases of 0.3% and 2.4%, respectively, surpassing previous valuesAnticipated fluctuations in oil prices for 2025 may exacerbate movements in the CPI data for January.

In a report released just before the CPI figures, the U.SEnergy Information Administration (EIA) projected steady oil demand through 2025 while raising supply forecasts, leading to a decline in oil prices

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This development prompted market speculation that the rise in oil prices might only be a transient phenomenon.

However, analysts maintain that with an overall higher baseline for oil prices through 2024, even if there is a further decrease in oil prices in 2025, the waning effects of high baseline figures may lessen the negative impact of oil prices on year-on-year CPI growthThus, the contributions of oil prices to overall CPI could trend toward neutrality or even a positive contribution.

The persistence of the core CPI, excluding energy and food prices, presents its own set of questionsKey to understanding the core CPI is the housing index, which represents nearly 46% of total core CPIIn December, housing items showed no change, leading the core CPI to cool partly due to a reduction in year-on-year growth to its lowest rate since January 2022, coming in at 4.4%.

Nonetheless, the methodology used to calculate housing costs introduces a lagging effect, as it is influenced by landlords’ subjective assessments of rent rather than immediate market transaction prices

Rental agreements often span extended periods, limiting the reflection of market rent variations in the indexesFurthermore, the 'installment payment effect' concerning housing costs persists for longer durations.

According to CITIC Securities, inflation pressures facing households are likely to endure for an extended period, with taxation implications drawing considerable attentionThe nuances of taxation forms and their impact are seen as crucial, with more significance placed on the methods rather than the amounts.

Liu Gang, chief strategist for Hong Kong stocks and overseas analysis at CICC, noted that the uptick in the core CPI is largely due to energy costsGiven the recent oil price trends, he anticipates that upcoming data will still influence the overall outlookHe highlighted that although core CPI easing is attributed to service costs, including healthcare and hospitality, rental prices and transportation costs are trending upward

The looming reconstruction demands resulting from the Los Angeles wildfires also warrant monitoring.

Interest rate cut expectations from the Federal Reserve have shown signs of recoveryChief economist Xiong Yuan at Guosheng Securities considers two rate cuts by the Fed in 2025 to be the baseline scenarioThe latest CPI data has shifted market expectations toward the anticipation of two cutsShould upcoming months reflect a continued gentle decline in inflation data, this expectation is likely to solidify further.

Journalist Nick Timiraos remarked that the U.SCPI report had little influence on the likelihood of the Federal Reserve pausing interest rate cuts in JanuaryThe mixed data does not provide clear direction on future inflation trends, and the Fed appears to be in a wait-and-see posture, needing several months of additional data before deciding on policy actions.

Tina Adatia, head of fixed-income client portfolio management at Goldman Sachs Asset Management, stated that although the latest CPI data might not suffice to revive talks of a rate cut this January, it strengthens the viewpoint that the Fed's rate-cutting cycle is not yet concluded

Despite strong labor market data permitting the Fed to remain patient, additional favorable inflation data is required before any further loosening of policy occurs.

Last Friday's robust job numbers briefly led markets to speculate that the Fed might resume cutting rates by as early as June 2025. However, following the CPI release, swap traders fully anticipated that the Fed would reduce rates prior to July, with market expectations for cuts in 2025 shifting from one likely cut to two, with the earliest potential rate cut moved up from June to May.

Ellen Zentner, chief U.Seconomist at Morgan Stanley, commented that Wednesday's CPI results will not alter expectations for a pause in rate hikes later this month but might curb some discussions surrounding potential increases"From the market's initial reactions, it seems investors have experienced a sense of relief after several months of persistent inflation," she noted.