Abnormal Details Under Weak December CPI Data

In December, the core CPI in the United States increased by 0.24% month-on-month, slightly lower than Citigroup's previous forecast of 0.27% and the market consensus of 0.3%. Although the details of the fourth-quarter inflation data appear unusual and difficult to interpret due to data collection issues caused by the government shutdown, the overall weak trend further confirms that underlying inflation pressures are slowing down by 2026.

According to news from the Wind Trading Desk, a recent report released by Citigroup's Veronica Clark team on the 13th stated that despite significant reverse volatility disturbances in the data, such as strong entertainment service prices offset by weakness in communication and moving services, core commodity prices remained flat overall, and housing-related inflation only rose moderately. Recent consecutive downward surprises indicate that inflation risks are no longer skewed to the upside.

As a result, market expectations for the Federal Reserve's easing path have been supported. Citigroup economists expect that as data in the coming months further confirms the trend of slowing inflation, Federal Reserve officials will feel more comfortable with interest rate cuts. Citigroup maintains its baseline forecast, that the Federal Reserve will further cut interest rates in March, July, and September.

The report noted that as the monthly data for the first quarter is no longer significantly affected by government shutdown-related issues, a more pronounced slowdown in various service prices is expected. Although the current downward data contains some unsustainable fluctuations, the overall direction still points to a weakening of underlying inflation pressures.

Core Data Below Expectations

The core CPI recorded a month-on-month increase of 0.24% in December. In terms of breakdown, core commodity prices were flat for the month. Among them, used car prices fell by 1.1%, offsetting the moderate increases in furniture (up 0.5%) and clothing (up 0.6%). Prices for other items such as computers, entertainment goods, and alcoholic beverages were nearly flat.

In terms of housing-related inflation, primary rent and owners' equivalent rent (OER) were slightly stronger than Citigroup's expectations, rising by 0.26% and 0.31%, respectively, but still within the typical range of increases for this year. Hotel accommodation prices recorded a strong growth of 2.9%. Overall, the CPI increased by 0.31% month-on-month, with food prices rising by 0.7% and energy prices rising moderately by 0.3%.

Data "Anomalies" Due to Government Shutdown

Citigroup pointed out in the report that the details of the December data remain "somewhat anomalous and difficult to interpret." This distortion mainly stems from data collection issues arising from the government shutdown.

The report analyzed that due to the use of carry-forward imputation in the CPI data for October and November, this caused a downward bias in inflation at that time and led to a mechanical rebound in December. This may have pushed up prices for items such as clothing and furniture. In contrast, wireless telephone service prices fell sharply by 3.3% in December, but this was not affected by collection issues (the data was actually collected in October and November) and reflected a price decline due to quality adjustments. This means that the decline in this item may not be repeated, but a significant rebound is also unlikely.

Mixed Performance of Service Prices

Excluding housing-related core service prices, the performance was mixed, with significant fluctuations in various components greater than usual. Medical services rose steadily by 0.4%, entertainment services recorded a very strong growth of 1.8%, and airfares increased by 5.2%, in line with remaining seasonal factors These increases were offset by weak prices in education and communication, which fell 0.8% overall. Prices for personal services decreased by 0.2%, and moving services also showed weakness. Analysts believe that the significant rebound in entertainment services may reflect a correction of the previously weak data from November, or a one-time price increase in subscription services, and these sharp fluctuations are not expected to recur in the coming months. The rebound in dining prices will also push up core PCE inflation, which may similarly be a correction of the November data