Wednesday’s release of the December Consumer Price Index will provide fresh insights into inflation's trajectory, potentially influencing the Federal Reserve’s policy stance amid mounting uncertainty over interest rates.

The eagerly awaited report follows Tuesday’s release of the Producer Price Index for December, which showed wholesale prices advancing 3.3% year-over-year, slightly below the 3.4% expected.

December CPI Preview: What To Watch

The headline inflation rate is projected to rise 2.9% year-over-year, according to TradingEconomics, marking an increase from November's 2.7% pace. On a monthly basis, headline inflation is expected to grow by 0.3%, maintaining the same pace as the prior month.

Core inflation, which excludes volatile food and energy prices, is forecasted to remain steady at 3.3% year-over-year, while core prices are anticipated to advance 0.2% month-over-month, down from 0.3% in November.

Bank of America economist Stephen Juneau said his team expects core CPI to register a "soft 0.3% m/m, with risks of rounding down to 0.2%."

Juneau anticipates cooling in core goods prices while core services remain largely unchanged. Categories like airfares and lodging, which surprised to the upside in November, are projected to moderate.

"Shelter prices have cooled relative to earlier in 2024, but there is still room for improvement," Juneau added.

Juneau also indicated that the Fed is likely to remain on hold for an extended period but flagged the risk of a rate hike if inflation remains sticky.

“If core PCE inflation exceeds 3% and long-term inflation expectations become unanchored, hikes will be in play,” he said.

Betting Markets Signal Confidence In Inflation Staying Elevated

According to data from CFTC-regulated prediction platform Kalshi:

There is a 99% probability of headline inflation coming in above 2.7% year-over-year.

75% probability it exceeds 2.8%.

28% probability it surpasses 2.9%.

Just 2% probability it breaks the 3.0% level.

Traders betting on headline CPI above 2.9% – an outcome that would top economist consensus estimates – stand to receive $3 for every $1 wagered if the event resolves to YES.

For core CPI, the market shows:

A 99% chance it comes in above 2.9%.

96% probability it surpasses 3.0%.

93% chance it breaks 3.1%.

62% chance it exceeds 3.2%.

Only a 20% probability it rises above 3.3%.

A $1 wager on core CPI exceeding 3.3% could yield $4 if the event resolves positively.

Betting on monthly shelter inflation also reflects significant interest:

99% chance shelter inflation exceeds 0.1%.

81% chance it surpasses 0.2%.

A 51% probability it comes in above 0.3%.

A slim 7% chance it breaks 0.4%.

Those betting $1 on shelter inflation exceeding 0.4% stand to win $5 for every $1 wagered if the outcome resolves to YES.

Fed’s Dilemma: Hawkish Or Dovish?

The December inflation data will play a pivotal role in shaping expectations for the Federal Reserve's next policy moves.

While Fed futures currently assign a 97% chance of holding rates steady in January and 78% in March, inflation’s persistence above the Fed's 2% target is complicating the outlook for 2025.

Bank of America no longer anticipates rate cuts this year, revising its forecast following December’s stronger-than-expected jobs report. "Inflation appears to have stalled moderately above the Fed’s target," Juneau said. The bank also flagged the risk of debates shifting towards rate hikes.

Fed futures point to a 55% chance of a rate cut by June, but that likelihood increases to 70% by October, as per the CME FedWatch Tool. However, if inflation prints above expectations, markets could see further delays in rate cuts, with the first reduction potentially pushed into late 2025 or even 2026.

Conversely, a lower-than-expected inflation print could bolster the case for cuts as early as mid-2025, reinforcing speculation of monetary easing by summer.

Read now:

Oil Could Hit $90, Goldman Sachs Says: ‘Trump May Not Ease Sanctions’ On Russia

Image created using artificial intelligence via Midjourney.