US CPI: is the disinflation trend over and Bitcoin surges.

US inflation rose last month and was at the higher end of analyst estimates. Headline inflation rose by 0.3% MoM in December, while the annual index rose to 3.4%, up from 3.1% in November. The core index rose by 3.9% vs. a 4% annual rise in November, however, this was higher than analyst estimates. The question is whether the disinflation trends that we have seen are coming to an end, or if this was a blip and price growth can continue to fall in the coming months.

The key driver of higher inflation last month was shelter costs, electricity, gasoline, food costs, medical care, and car insurance. The monthly growth in the shelter index expanded at a higher rate than November, at 0.5% vs. 0.4%, and measures of rental costs were also up. This has dashed hopes that the trend for shelter costs was lower.

Are shelter costs telling the whole story?

However, there are mixed signals coming from the rental market, which may be down to different methodologies for recording rental prices. The Rent Report, a monthly research report on renting trends in the US, has reported yearly declines in the US rental market. It reported that annual rents fell by 2.09% in November, the first time in more than 3.5 years that yearly price growth had dipped by more than 1%. The report said that the pace of monthly declines slowed in November, however, the current national median price for monthly rents was $1,967 in November, this compares to the peak in August 2022 of $2,054.

Undoubtedly, the slowdown in rents has been a slow process, but it appears that declines in the rental costs are not yet seeping into the official inflation figures. This could change in the coming months, and if rents continue to fall then it could put downward pressure on official inflation measures.

Elsewhere, if you look at super core inflation, and strip out healthcare, and shelter costs, then the rise in core prices suggests that the disinflationary narrative remains in place.

Services vs. goods price inflation

There was still a split between services and goods when it comes to inflation, with services still generating inflation, while goods price inflation fell in some areas. The Bureau of Labor Statistics, who publish the inflation figures, said that household furnishings and operations fell in November, along with personal care index.

Supply disruption still a warning sign on inflation in the west

Overall, this report alone does not change the dial on the inflation narrative, especially as measuring shelter costs is controversial and there are different measures of shelter costs, especially rental costs. However, it is a warning sign. Right now, domestically generated factors have pushed up inflation, rather than supply issues. However, with disruptions to the Red Sea shipping lanes, and rising shipping costs, there is a risk that goods price inflation could also turn higher and add upward price pressure in the US in the coming months. Due to this, we believe that a March rate cut from the Fed is unlikely, as the Fed instead chooses to wait to gauge if global supply chain disruption and volatile energy prices feed into higher rates of inflation later this year. The CME fedwatch tool continues to show that the market is expecting the Fed to cut rates in March, however, we think that the market is too optimistic on this.

Bitcoin surges on ETF market debut

Elsewhere, the price of bitcoin has surged today, as it makes its ETF trading debut in the US, after the SEC approved the first of 11 bitcoin ETFs to start trading on a regulated exchange from Thursday. Bitcoin rose by nearly 5% to $47,000, according to Coindesk. While this comes after a muted response to the approval on Wednesday night, it does highlight how volatile cryptocurrencies are, on the both the upside and the downside. We will have to wait and see if trading crypto in ETF form reduces this volatility. It also reminds us of SEC Chair Gary Gensler’s comments about Bitcoin when he announced that the SEC would grant approval for its first ETF. He said that the SEC does not “approve of or endorse” bitcoin as an investment product.