The government’s closely watched revisions, released on Friday, revealed that consumer prices in the marketplace increased at a pace even slower than initially reported. According to updates to the consumer price index, the broad basket of goods and services measured saw a 0.2% increase on the month, lower than the initially reported 0.3%, as stated by the Labor Department’s Bureau of Labor Statistics.
While the change is relatively modest, it reinforces the notion that inflation was easing towards the end of 2023. This provides the Federal Reserve with more flexibility to consider interest rate cuts later in the year.
Although these revisions are standard for the Bureau of Labor Statistics, they attracted additional attention this year due to the market’s sharp reaction to last year’s adjustments. Previous indications of higher-than-expected inflation in 2022 had driven Treasury yields up, causing concern among investors that the Fed might maintain a more restrictive monetary policy.
Fed Governor Christopher Waller had specifically drawn attention to the revisions in 2022, further heightening market scrutiny. The core Consumer Price Index (CPI), excluding food and energy, remained unchanged at a 0.3% increase for the month, in line with the initial report. Fed policymakers typically focus more on core measures for a better indication of long-term inflation trends.
Additionally, the headline reading for November was revised higher, up to 0.2% from the initial 0.1% estimate. Overall, the revisions suggest that the headline CPI accelerated at a 2.7% annualized rate in the fourth quarter, down by 0.1 percentage point from the initial figures, according to Ian Shepherdson, chief economist at Pantheon Macroeconomics. Looking further ahead, second-half revisions put CPI higher by 0.003 percentage points, according to Goldman Sachs calculations.
While some analysts view the revisions as relatively inconsequential, they acknowledge the potential influence on the Fed. Paul Ashworth, chief North America economist at Capital Economics, noted that, considering concerns about a repeat of last year’s impact, the lack of meaningful change this year supports the possibility of an earlier rate cut in May.
It’s important to note that the Federal Reserve primarily prioritizes the personal consumption expenditures price index as its main inflation gauge. The CPI readings contribute to the Commerce Department’s PCE calculation, with the key difference being that the CPI reflects the cost of items, while the PCE adjusts for consumer behavior changes in response to price fluctuations.
Despite the data release, futures market pricing showed little change. Traders generally anticipate the Fed to maintain its benchmark overnight borrowing rate in March and then consider a cut in May, followed by four more quarter-percentage-point reductions by the end of the year, according to CME Group projections.
