The inflation landscape in the United States has shown signs of weakening, particularly as indicated by the Consumer Price Index (CPI) data for December, which fell short of market expectationsThis development has momentarily dampened the “inflation trade” that had previously absorbed investor attentionA noteworthy factor contributing to this shift is the declining inflation in durable goods, suggesting a change in consumer behavior and economic conditions that might persist into the near future.

As we analyze the trends, the onset of 2025 may paint a picture of gradual “de-inflation” in the U.Seconomy; however, uncertainties loom large, particularly with the implications of tariff policies that could trend upward in complexity—a phenomenon labeled as "Tariffs 2.0." Projections indicate that by 2025, wage growth may continue to gain ground alongside core inflation for non-rent services, contributing to a compelling narrative of economic change

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The strong base effects from previous years could also create a pronounced decline in year-on-year CPI figures during the initial months of 2025, although a modest rebound might follow, stabilizing around the 2% mark towards the year's end.

In December, the CPI was revealed to be 2.9% year-on-year and 0.4% month-on-month, equating to market expectationsHowever, core CPI slipped to 3.2% on an annual basis and 0.2% monthly, slightly dampening the outlook among policymakers and market participantsFollowing the release of these figures, expectations surrounding Federal Reserve interest rate cuts saw a mild uptick, complemented by dovish tones from several Fed officials, suggesting a willingness to engage in stimulative measures to address economic vulnerabilities.

The decline in U.STreasury yields became evident in the wake of the CPI announcement, reflecting a cooling of the “re-inflation” trading strategies traditionally adopted by investors

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As this scenario unfolded, the 10-year Treasury yields saw a notable pullback, with TIPS yields decreasing by approximately 14 basis pointsDespite subdued implied inflation expectations, the market remains on alert due to the myriad uncertainties surrounding fiscal and monetary policies, which could lead to sustained volatility in interest rates.

Understanding the underpinnings of the core inflation rates reveals that durable goods were the primary culprits in the softer-than-expected inflation figures for DecemberWith global oil prices on the rise and exerting upward pressure on energy CPI, it is essential to note how the overarching inflation narrative is influenced by the consumption behaviors of durable goodsIn particular, rising borrowing costs, attributed to higher Treasury yields, may be leading consumers to reconsider their spending on high-ticket items that often require financing

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Coupled with a slight deceleration in wage growth—resulting in a decrease in disposable income—demand for automobiles and other durable goods has consequently dropped, contributing to the cooling of durable goods inflation.

Interestingly, while overall trends in durable goods inflation indicate a slowdown, the Manheim Used Vehicle Index suggests a potential short-term rebound in vehicle inflation, signaling a complex interplay of factors at work in the consumer marketplaceRent inflation, though cooling slightly, continues to relay signs of a pre-existing “de-inflation” trend, projected to maintain its courseThe cyclical relationship between housing prices, new leases, and rent calculations suggests that while current housing analytics support possible increases in rent inflation, falling growth rates for new leases may negate this upward pressure moving forward.

Aspects relating to labor market dynamics cannot be overlooked

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The ongoing “relaxation” phase in the U.Slabor market may encounter stalemate, presenting significant implications for sustained service inflationWhile average hourly wage growth indicated a marginal decrease in December, early indicators from leading labor metrics suggest an impending thaw in employment conditionsThe ISM Services PMI price index, for example, escalated to 64.4%, a notable increase of 6.2 percentage points from the previous monthConcurrently, small business employment plans conveyed mixed signals, indicating heightened intentions among employers to expand their workforce, which indicates that the employment sector may be poised for renewed vigor.

With these labor market dynamics at play, the potential for cost increases for employers looms, leading to a cascading effect of higher operational costs that could anchor service inflation moving forward into 2025. Tariffs 2.0, which could manifest as escalating complexities in trade and cost structures, enhance the prevailing uncertainties in the economic forecasting landscape, amplifying the importance of monitoring wage trends and employment metrics closely.

As projections for 2025 emerge, the overarching trends suggest that gradual “de-inflation” is probable, despite the backdrop of disconcerting uncertainties tied to tariffs and labor market fluidity