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Deflation Despite Fed, Not Thanks to It

Implications for January inflation and future Fed rate hike cuts

Someone forgot to forward eggs this morning's CPI print. Inflation is now down from 9.1% to 6.5% over the last 6 months. December saw deflation, but no thanks to the Fed. 

Let's dive in. 

The December CPI report came in as expected, with a -0.1% headline print (month-over-month) and a 0.3% core (core is inflation excluding food and energy). The difference between headline and core was largely driven by a plunge in gas prices during December, a trend which will likely not continue in January.

As a result, expectations moving forward have changed little: 0.2-0.3% headline and core CPI in January and roughly 3% annual inflation in 2023. 

The bigger change is in expectations of Federal Reserve behavior. By eliminating the upside risk from the January print, the probability of a 50 bp hike in the Fed’s next meeting has fallen from 25% to 9%. Terminal rate expectations, however, remain consistent at 4.75-5.00% and the probability of a rate cut sometime in 2023 remains consistent at 38%.

One notable feature of the CPI report was the eye-popping housing (shelter) inflation, with 0.8% month-over-month growth. Many observers–including Jerome Powell–consider shelter CPI to heavily lag market indicators that currently show a complete stagnation (or even modest decline) in the rental prices.

As a result, many observers like former CEA chair Jason Furman like to combine market-based rent measures from Apartment List and Zillow with other CPI measurements for other sectors, finding that prices have actually fallen (very slightly) over the last three months.

Another piece of positive news: weekly initial unemployment claims remain low (205,000), providing further evidence that the labor market remains strong for now. The elusive soft landing remains a very real possibility.

Despite all of this good news, why have the financial markets not reacted?

Because all of this was already priced in. Some adjustments need to be made for eliminating some of the uncertainty surrounding the print, but by and large this was the print that markets expected.

We've Got a Winner(s)

We went on a search for the best forecaster in December. We were looking for who could build the best tool using our recently released APIV2. Oh, and we'd give them $1,000.

The search was far and wide and, honestly, there were too many supreme submissions to pick just one winner. That's why, without further ado, we're excited to announce our winner...plus a runner-up!

Winner: Octopools

Runner-Up: Mase Carb

We believe this suite of new tools is remarkably powerful, and we are very excited to watch you all try them out. As always, your feedback is at the center of our mission to promote prediction markets, so please do not hesitate to reach out with any questions, comments or requests for features.

ICYMI: The CPI Recap

In case you're a serial scroller and missed all the above, we hosted a live panel on Twitter for analysis pre- and post-CPI print. Listen to the recording now, and special thanks to our featured speakers:

  • Co-founder, chairman, and chief investment officer of Ritholtz Wealth Management, with currently over $3 billion dollars in assets under management

  • Creator and host of Masters in Business, the most popular podcast on Bloomberg Radio

  • Called the “blogfather” for his long-standing finance weblog, The Big Picture

  • Director of the Chief Data Office at Fitch Group

  • Formerly a Data Lead at Bloomberg

  • Twitter Spaces super-host 

  • Serves as the CIO at 3D/L Capital. He helps their advisor partners understand market developments

  • His career spans 3 bear and 3 bull markets

  • Founder of Cubic Analytics

  • Insights include macro analysis & market research

  • Former $30Bn+ portfolio analyst in corporate banking 

  • Oxford PhD who runs Oraclum, a data science company

  • In his spare time, he also writes about markets & investing 

Happy trading!

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