In December 2024, the United States experienced a noteworthy shift in its core Consumer Price Index (CPI) dataThe month-on-month change stood at a mere 0.2%, falling short of market expectations which had forecast a 0.3% increaseThis marks a significant deviation from a four-month trend of steady 0.3% increasesYear-on-year, the core CPI registered at 3.2%, showing a slight decline from the previous three-month average of 3.3%. While this recent core CPI reading was lower than anticipated, it also revealed a distinct divergence within various expenditure categories under the CPI structure.

Among the categories, critical sectors such as energy, transportation services, and core goods displayed increased month-on-month dataFluctuations in energy prices, influenced by global geopolitical tensions, oil-producing countries’ policies, and seasonal demand, led to a rise in DecemberTransportation services also recorded an uptick as economic activity began to restore itself, resulting in heightened logistics and transportation demandAdditionally, the pressures stemming from labor costs contributed to rising prices in transportation servicesCore goods, impacted by supply chain adjustments and the volatility of raw materials prices, also presented relatively high month-on-month figuresYet, in contrast, categories like shelter and transportation services continue to reflect high year-on-year figuresThe housing component, as a significant household expense, is subject to dynamics in the real estate market, rental price adjustments, and the broader economic climate, keeping prices elevated.

When examining the overall influence of the latest inflation data, it seems to ease some of the already acute "tightening panic". The notably low core CPI month-on-month reading suggests that inflationary pressures have, to some extent, been contained and that market expectations for further aggressive interest rate hikes by the Federal Reserve have cooled off slightly

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However, given the structural divergence within the CPI and the sustained high levels in certain key categories, this data alone may not suffice to convince the Federal Reserve and investors that inflation will smoothly diminish by 2025. To obtain a thorough and nuanced understanding of the current stage and future trajectory of U.S. inflation, a retrospective look at its evolution over a more extended time frame is particularly essential.

Reflecting on 2024, both CPI and core CPI displayed a general decline, albeit with differences in their trajectoriesThe process of decreasing core CPI was relatively jagged, not showing the same straightforward decline seen in overall CPI.

In terms of pacing, the first quarter of 2024 saw unexpected increases in both CPI and core CPIThis was largely due to supply shortages of certain raw materials during the global economic recovery process, leading to rising production costs which subsequently impacted consumer pricesFurthermore, the rapid release of domestic demand exerted additional pressure on pricesHowever, as the second quarter commenced, the inflation landscape shifted rapidly, with a swift decline in inflation ratesThis decline was facilitated by the gradual effects of a series of monetary policies enacted by the Federal Reserve and improvements in the global supply chain, effectively mitigating cost pressuresThe rapid decline in the second quarter essentially compensated for the earlier deficiencies observed in the first, demonstrating a trend of inflation that initially rose and then retracted in the first half of the yearBy the second half, the inflation trajectory aligned primarily with a "neutral" scenario, avoiding drastic rebounds while also not entering a period of excessive downturn.

Diving deeper into the structural insights of the CPI, the contrasts reveal clearer patterns of change

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Comparing December 2024 with December 2023, most key components showed reduced year-on-year growth ratesThis reflects the progress made by the United States over the past year in controlling inflation rates across various sectors ranging from everyday consumer goods like food and clothing to industrial manufactured productsMoreover, when juxtaposing December 2024 with December 2019, it can be seen that many segments still maintain year-on-year figures above pre-pandemic levelsNotably, both shelter and transportation services exhibited significant contributions, with shelter contributing an extra 0.51 percentage points to the overall CPI year-on-year, and transportation services contributing an additional 0.44 percentage points—combined, these two sectors contributed nearly 1 percentage point to CPITherefore, if shelter and transportation services could revert to 2019 price levels while holding other categories constant, the U.SCPI would effectively return to a target inflation rate of 2%. Thus, accurately forecasting the future direction of U.SCPI hinges critically upon evaluating these two sectors.

Overall, U.S. wage growth and the year-on-year increase in (real) service spending have begun to retract from their previous highsThe slowdown in wage growth correlates with the gradual stabilization of the labor market, where pressures on hiring and employment for businesses have eased, thereby diminishing the momentum for salary hikesThe decrease in real service consumption growth indicates a rationalization of consumer spending in servicesTogether, these factors create space for cooling core services inflationHowever, a potential threat looms from the tightening of immigration policies, which may induce labor shortagesParticularly within the service industry, labor shortages could further inflate costs, generating new inflationary pressures.

From a structural perspective, different components exhibit varying performance

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In the realm of shelter, there appears to be a lagging correlation between CPI shelter inflation and market rental prices and housing valuesDespite housing prices remaining stubbornly high due to land supply restrictions and real estate development cycles, CPI shelter inflation is likely to benefit from the stabilization of market rents, leading to improvementsAs the rental market's supply-demand dynamics gradually attain equilibrium, upward pressures on rent will ease, aiding in lowering CPI shelter inflation rates.

Focusing on transportation services, the growth rate of motor vehicle insurance costs continues to lag behind that of vehicle prices and labor costsThis is largely due to the complexities of pricing mechanisms within the insurance industry, which are influenced by multiple factorsHowever, this suggests there remains room for potential decrease in motor vehicle insurance expenses in the futureNonetheless, high labor costs may constrain how significantly motor vehicle insurance and transportation service inflation can dropAmidst changes in the labor market, sustained high labor costs present considerable pressures on transportation services suppliers regarding cost control, subsequently influencing the pricing adjustments of transportation services.

Considering the energy sector, when accounting for the global energy market's patterns of supply and demand, the development of new energy technologies, and revisions in national energy policies, there appears to be a low likelihood of significant energy price surges in 2025. The production policies emerging from the Organization of the Petroleum Exporting Countries (OPEC) and other oil-producing nations remain relatively steadyFurthermore, the promotion and application of new energy solutions have begun to alleviate reliance on traditional energy sources

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