The December Consumer Price Index (CPI) report came in stronger than expected on Thursday, with inflation coming in above economists' expectations, prompting some doubts regarding the Federal Reserve's potential rate cuts.
Ahead of the release, analysts at UBS said in a note that they believe inflation will likely now fall at a more gradual pace and will slow in the first half of 2024.
Today's data backed up their stance, with headline U.S. CPI rising 0.3% last month, representing an annual gain of 3.4%, compared to expectations of 0.2% and 3.2%, respectively.
However, BofA said in comments following the data that "the report still suggests that inflation is cooling as core inflation on a three-month annualized rate edged down a tenth to 3.3% and the y/y rate fell below 4%."
"Headline and core CPI beat consensus expectations and were a few basis points stronger than our own forecasts," the bank stated in a note. Analysts at BofA believe some drivers of the strength this month, particularly used cars, should fade in the coming months. As a result, the firm is comfortable with its expectation that the Fed will cut rates by 25bp in March.