Inflation Cools Once Again: What the Experts Are Saying

Inflation continued to moderate in December, adding to the evidence that our worst bout of rising prices in four decades has passed and that the Federal Reserve should continue to slow its pace of interest rate hikes.

The Consumer Price Index (CPI) declined 0.1% in December after rising 0.1% in November, driven down by cheaper gasoline costs, the Bureau of Labor Statistics reported Thursday. On a year-over-year basis, CPI increased 6.5% last month, the lowest reading since October 2021.

Core CPI, which excludes volatile food and energy prices and is considered by economists to be a better indicator of underlying inflation, rose 0.3% in December after ticking up 0.2% the previous month. On an annual basis, core CPI rose 5.7%, the slowest pace since December 2021. 

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The most recent inflation readings, which were in line with economists' forecasts, help bolster the case for the Fed to continue to moderate its pace of interest rate hikes.

The Federal Open Market Committee (FOMC), which is the central bank's rate-setting committee, raised the federal funds rate by 50 basis points (0.5%) when it last met in December 2022. That snapped a streak of four consecutive 75-basis-point hikes. 

Market participants are betting that the FOMC will raise the benchmark rate by 25 basis points when it concludes its upcoming two-day meeting on February 1, according to CME FedWatch. 

The equities markets eventually applauded the good news on inflation, even if traders were initially somewhat disappointed that the CPI data didn't come in softer than expected. The Dow Jones Industrial Average, S&P 500 and Nasdaq Composite struggled to stay out of negative territory Thursday morning before turning positive in the early afternoon.

With the December inflation report now a matter of record, we checked in with economists, strategists, investment officers and other market pros to see what they had to say about the state of the economy, markets and the Fed's path going forward. Please see a selection of their commentary, sometimes edited for brevity or clarity, below: 

• "Although headline CPI inflation came in lower than expected, core CPI came in as expected as shelter price increases remained strong. We expect shelter prices to start weakening by the middle of 2023. This lower-than-expected headline CPI inflation print will not make the Federal Reserve (Fed) change its view on the need to keep increasing interest rates in February and March of this year." – Eugenio Alemán, chief economist at Raymond James
• "Another relatively mild inflation report is welcomed news and could tip the odds toward the Fed dialing down the pace of rate hikes to 25 basis points at the next meeting. The report will be welcomed news at the Fed, as two out of three of Powell's key inflation categories (core goods, shelter, and core services ex-shelter) are now moving in the right direction: down. And it's only a matter of time before the shelter component rolls over. Three months of relatively lighter core inflation figures is starting to form a trend … one that could spur the Fed to slow the pace of tightening further on February 1." – Sal Guatieri, senior economist at BMO Capital Markets
• "CPI inflation slowed sharply at year-end as consumers got relief from lower gasoline prices, and prices of most foods rose more slowly. Home heating costs rose 1.5% on the month and 15.6% on the year in December, but with weather mild across the majority of the country that escaped the Christmas blizzard, the impact on household budgets is so far smaller than feared a few months ago. Lower durable goods prices are also bringing down inflation. Americans have gone from splurging on goods in the lockdown months of 2020 and 2021 to redirecting spending towards essentials and experiences. The production side is helping, too, since manufacturers ran production at a high clip in the last two years and wholesalers and retailers rebuilt inventories. In short, the December CPI report was welcome good news after a very bad patch for inflation." – Bill Adams, chief economist at Comerica Bank

• "This morning's Consumer Price Index release showed inflation slowed to 6.5% year-over-year (YoY) from 7.1% YoY in December, marking the sixth consecutive decline in CPI.  Month-over-month (MoM) CPI decreased by -0.1%, the biggest MoM drop since April 2020. We think inflation will continue to remain stubbornly high for the rest of 2023, but will moderate to around 3.5% by the end of the year, above the Fed’s 2% target. While we can safely say that we are past peak inflation, it is too early to call victory in the battle against higher inflation. This means that investors should continue to think about hedging against inflation and consider how higher interest rates for longer could affect their portfolios." – Gargi Chaudhuri, head of iShares Investment Strategy, Americas
• "Today's inflation print is another sign that the Fed's prescription for bringing down high inflation is working. Headline CPI had its first monthly decline since 2020 as higher policy rates appear to be starting to slow the economy. Within core inflation, the declines in used cars and airfares were offset by another strong month of shelter costs. Overall, the data set was in line with expectations and a continuation of this trend should bring the Fed's rate hike expectations down as we continue to get closer to the end of the Fed hiking cycle." – Charlie Ripley, senior investment strategist at Allianz Investment Management
• "Inflation clearly has slowed from its breakneck pace in mid-2022. Headline inflation has fallen by 2.6 percentage points since June, and the annualized run rate over the past three months is just 1.8%, demonstrating further slowing is still to come in the year-ago change. Additional progress should be made in the coming months as goods inflation remains soft and the lagged effect of slower housing cost growth eventually flows through to the CPI data. As a result, the days of 75 basis point rate hikes from the FOMC appear to be well in the rearview mirror. That said, we doubt the FOMC is ready to declare mission accomplished. We expect that even if the FOMC delivers a downshift in pace, it will continue tightening past its next meeting." – Sarah House, senior economist at Wells Fargo Economics
• "Investors waiting for an upside surprise will be disappointed that the CPI, which came in at 6.5%, met expectations. The market has been up since January in anticipation of a good number. Inflation has come down dramatically since it peaked in June at 9.1%. It will be interesting to see if the markets can hold the recent rally. Previously when we had good inflation data, the Fed came out with hawkish comments to bring the market down. However, we expect the Fed to pause this spring and we expect core inflation to be below 3% by year end. The trend is moving in the right direction. Earnings season tomorrow may be the catalyst the market needs to sustain the recent rally." – Gina Bolvin, president of Bolvin Wealth Management Group

• "My takeaway is that while inflation is slowing, the Fed may not be happy with how quickly it is slowing. I'd expect a 25 basis point hike come February 1 in response. The real story is whether inflation continues to grind lower to 2% or stops decreasing like we've seen the last couple months, which has opened up a lot of hopes across the market that the Fed has indeed slayed inflation and it's coming right back down to their target and in turn they can soften policy (cut rates) into the soft landing. This is TBD and I'm skeptical." – John Luke Tyner, portfolio manager at Aptus Capital Advisors 
• "Today's inflation report is the most important one of the month and it came in exactly as forecast. Given that the market had run up so much in advance of today, a lot of this news was already priced in. The big debate is whether the Fed will raise rates by 50 basis points or drop down to a more normal 25 basis points at their next meeting on February 1. Given that this report allows maximum flexibility for the Fed to do either, an increasing importance will be placed on the Personal Consumption Expenditures (PCE) report, which will be released on January 27." – Chris Zaccarelli, chief investment officer at Independent Advisor Alliance
• "The supersized Fed rate hikes are behind us – the CPI data put the Fed back on the 25 basis point track. These data show what everyone already knew — inflation peaked several months ago and we are on the road back to stable prices. The Fed has a real chance of sticking the soft landing if these data continue to fall at current rates — it's very possible we could reclaim 2% inflation by mid-year." – Jamie Cox, managing partner at Harris Financial Group
• "The CPI report was bang-on this morning. All in all, it should be enough to keep equities moving higher in the interim. The dollar resumed its downtrend, and yields are moving lower at the long end of the curve. The labor market is still very tight, though the claims data should be taken with a grain of salt due to the noise in holiday adjustments. Now all eyes can focus on earnings starting with the big banks tomorrow. While we expect reported results to be fine, we’ll be watching margins very closely to see how the changing inflation dynamics affect the bottom line." – Cliff Hodge, chief investment officer at Cornerstone Wealth

• "The weakening trend of inflation should convince the Fed to further downshift the pace of rate hikes in the upcoming meeting. The Fed will likely hike rates by 0.25% on February 1. The labor market must significantly cool before the Fed could appease markets by cutting the latter half of this year. Our base case is the economy will slow enough for the Fed to consider cutting rates sometime in the second half of this year." – Jeffrey Roach, chief economist at LPL Financial 
• "Deflating inflation is a bit like letting the air out of a balloon. The speed and shape can be hard to predict. Today's CPI report continues to depict an inflation picture that is moderating from generationally high levels over the past several months, and excessively so since the war in the Ukraine began, causing intense pressure on global energy and food prices. Today's numbers show an inflationary condition, which while improving, is doing so in an uneven way and remains still distant (on a year-on-year basis) from the Federal Reserve's target. That being said, the more near-term results we have seen suggest a very clear approach toward normalcy. Yet, similar to letting the air out of a balloon that has been over-inflated, the deflating process is often subject to some strange noise and gyrations along the way." – Rick Rieder, BlackRock's chief investment officer of Global Fixed Income and head of the BlackRock Global Allocation Investment Team
• "Inflation is extending its slide lower as prices moderate across the economy, a positive sign for the Fed as it narrows in on its target of widespread price stability. Energy prices have been leading the move lower, where a price decline of 20% over the last six months is the biggest drop since early 2016. Used vehicle prices, too, have seen a notable decrease over the last six months, falling 11.3%, the largest decline since 1974. It's reasonable to assume that investors will be piling into U.S. Treasuries as the risk of further price inflation to the upside appears to be in the rearview mirror, making the asset class an increasingly attractive investment in today's environment." – Peter Essele, head of portfolio management at Commonwealth Financial Network
• "Although the headline and core CPI figures were in line with market expectations, the details of the report were somewhat constructive from the Fed's perspective. Chair Powell has argued that disinflation in core services ex of housing is a necessary condition for overall inflation to return to the Fed's target on a sustained basis. There has been a significant slowdown in this component over the last few months. Accordingly, markets appear to have looked through the upside surprise in shelter inflation and are now pricing around an 80% chance of a 25 basis point hike (rather than 50 basis points) in February. This move makes sense to us as the risks of a 25 basis point hike are clearly rising. The Fed typically does not surprise markets during hiking cycles, so policymakers will have to push back strongly against current pricing if they plan to hike by 50 basis points." – U.S. Economics team at Bank of America Securities 

• "No surprise here – a weaker CPI was already priced-in by the bond market even before Thursday's number. Generally, the inflation shock over the past two years should be seen as a lesson for investors. Inflation shocks can happen quickly, and they have long lasting effects. Inflation linked assets should have a permanent place in all portfolios. Unless you were investing in the early 1980s, you haven't experienced a prolonged bout of inflation. Historically, inflation is a major issue investors face. We've gotten used to not worrying about it." – Nancy Davis, founder of Quadratic Capital Management and portfolio manager of the Quadratic Interest Rate Volatility and Inflation Hedge Exchange-Traded Fund (IVOL)
• "Thursday's softer inflation reading is likely supportive of equity prices moving higher and further evidence that the Fed's determination to quell inflation through rate hikes and balance sheet runoff is working. Inflation and the slowing economy will be a big focus for investors during the upcoming Q4 earnings reporting season. Investors should be careful about investing in sectors that are negatively affected by inflation, a slowing economy and high wages, such as technology, telecom and consumer discretionary. We believe investors should continue to remain defensive, yet opportunistic. Depending on this earnings season, investors may have a great opportunity to buy great companies on weakness as the quarter and earnings season progresses." – James Demmert, chief investment officer at Main Street Research
• "Expectations remain that the Fed will opt for a 0.25% hike at the next meeting, but a steeper 0.5% jump still can't be ruled out as core inflation which strips out volatile energy and food prices is still proving a much tougher nut to crack. Fed officials still face a super-tricky balancing act. They know there is a lag between rate hikes and the impact on the economy, but they are still worried that by not tightening enough, demand could race upwards again, causing lingering price pain." – Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown
• "The CPI report leaves our baseline FOMC call for a 50 basis point increase in the funds rate at the February meeting intact, though it likely raises the probability of a smaller hike of 25 basis points, with some recent Fedspeak appearing cautiously supportive of a smaller move. The final decision is likely dependent on the data flow in coming weeks." – U.S. Economics Research team at Barclays