Fin-X Rapid Response - December 19th

US CPI slowed by more than anticipated in November. But doubts surround the validity of the data gathered during the shutdown.

• US CPI increased by +0.2% (seasonally adjusted) between September and November, according to the BLS last night.

• Over the last 12 months, the all items index increased by +2.7%, compared to significantly higher consensus estimates of 3.1%.

• Core CPI ex-food and energy also rose by +0.2 over the same two months.

• The annual increase in core prices was +2.6%, compared to an anticipated +3.0% increase.

• From September to November, the index for shelter increased by +0.2%.

• The energy index rose by +1.1% over the same 2-month period, and the food index increased by +0.1%.

• Other indexes that increased over the 2 months ending in November include household furnishings and operations, communication, and personal care.

• In contrast, the indexes for lodging away from home, recreation, and apparel decreased over the same 2-month period.

• Shelter prices increased by +3.0% over the year ending November.

• Energy prices recorded an annual increase of +4.2%, while food was up +2.6%.

• The Fed's often-referenced core services ex-shelter component also fell sharply from +3.3% in September to +3.0%

• Yesterday, the president also announced that approximately US$2.5 billion would be paid to serving US forces as a "warrior dividend".

• S&P500 6,775 +0.8%, Nasdaq Comp. 23,006 +1.4%, S&P/ASX200 future 8,615 +0.5%,

• US 2yr 3.46% -2bps, US 10yr 4.12% -3bps

• US dollar (DXY) index 98.43 +0.1%, AUDUSD 0.6613 +0.1%, Gold US$/oz 4,333 -0.1%

Fin-X View

• Lower inflation should be perceived as good news. However, the sharp drop suggests that, if accurate, the US economy could be slowing much faster than many expect.

• The BLS reported that there were issues gathering the price data during the shutdown. So sceptics suggest that we won't get a decent reading until the December CPI report is published in mid-January.

• We can see that there is a reasonably sharp slowdown in activity across a wide range of sources and expectations are nevertheless rising that the Fed will have to cut rates by substantially more than the -0.25% median in the recent dot plots.

• We share this view based on a combination of slowing activity, fading price pressures in the highly-weighted shelter component, and the fact that businesses will likely struggle to pass on cost increases.

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