Investing.com -- The surprise dip in core inflation in December eased some jitters about a long Federal Reserve pause, but Macquarie is still sticking with its call for one rate cut, warning that disinflation has limited room to continue.
"Core CPI, however, was softer at +0.23% MoM, the lowest reading since July," Macquarie analysts noted in a report released Wednesday. This softer core reading provides some relief after recent data had suggested risks of a more elevated figure.
While headline CPI was firm rising 0.4% month-over-month, boosted by strong food and energy prices, the core measure, which excludes these volatile components, showed a more favorable trend. Year-over-year core CPI inflation remained steady at 2.9%.
Despite the positive print for December inflation, Macquarie maintains a cautious outlook, warning that the trend of disinflation hasn't much room to continue following a rebound in shelter costs and the impact of potential higher tariffs from the incoming Donald Trump administration.
Shelter costs showed some moderation, with both owners' equivalent rent and rent of primary residence rebounding to +0.31% month-over-month, Macquarie said, suggesting that this trend may be nearing its end. "Despite this, this disinflation trend is likely now in its later innings. Both OER and rent of primary residence are near pre-pandemic levels MoM," the analysts added.
The upside risks to inflation, particularly in core goods, which are vulnerable to potential higher tariffs from President-elect Donald Trump, is likely to keep the Fed in a cautious stance on rate cuts.
"Our baseline remains for just one further 25 bps cut from the FOMC, with the most likely timing being March or May. Risks remain skewed to a later date," the analysts said. That trails the Fed forecast in December summary of economic projections that called for two rate cuts this year.