CPI data dominates the economic news, as we prepare for earnings season 

• December's U.S. CPI report indicated a higher-than-expected rise in consumer prices, hinting at a gradual approach to future interest rate cuts.
• Geopolitical tensions in the Middle East have led to increased oil prices and transportation costs, potentially influencing future goods inflation.
• Tech giants, including Alphabet and Amazon, hit 52-week highs, with Microsoft and Nvidia reaching all-time high levels since their IPOs.

This week has been relatively quiet in terms of data, with attention predominantly focused on Thursday's release of the U.S. consumer price index (CPI) numbers and the onset of the earnings season on Friday. Major American banks will once again take the lead in this regard.

The report for December's consumer price index reflected a slightly higher-than-expected increase. Consumer prices rose by 0.3% for the month, driving the annual rate to 3.4%. This was marginally above the projections of economists surveyed, who had anticipated a 0.2% rise in December and a 3.2% increase on a year-over-year basis. The core CPI, which excludes the more volatile food and energy prices, aligned with expectations, indicating a sustained yet moderating pressure from inflation. The data hinted that the pace of future interest rate cuts might be more gradual than initially expected. We mentioned in our latest communications that the markets might have been getting ahead of the U.S. Federal Reserve (the Fed) and themselves lately, and it appears that they’re reaching the same conclusion.

A significant driver of this inflation was shelter costs, which not only comprised over half of the overall increase but were also the primary contributor to the monthly rise in core items. Food prices reached an all-time high. The stronger-than-anticipated CPI data suggests that the journey back to the Fed’s 2% inflation target is not straightforward, with potential challenges in the final stages. The previous few months had seen a decline in the inflationary impact of core goods, but this effect appears to be waning, as we’ll discuss in the next paragraph. Achieving the Fed's inflation target may require more than just a reduction in rent inflation. It's worth noting, however, that some of the categories driving December's core CPI have less influence or are more dependent on producer prices in the Fed's preferred inflation measure, the Personal Consumption Expenditures (PCE) deflator.

In other news, oil prices saw an increase on Thursday, following Iran's seizure of an oil tanker in the Gulf of Oman. This incident reignited concerns about potential disruptions in crude supply due to Middle East tensions. These geopolitical strains are also causing a rise in transportation costs, as shipping routes are being diverted from the Red Sea to longer alternatives. Overall, these tensions are also beginning to impact inflation expectations, particularly regarding goods inflation.

Despite our prediction that this year would be dominated by the "Forgotten 493"  (those companies in the S&P 500 Index that aren’t members of the Magnificent Seven — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla), it doesn’t mean that Big Tech can’t continue to excel. Tech giants such as Alphabet and Amazon were among the numerous S&P 500 stocks that reached 52-week highs this week. Of these, many achieved all-time highs (notably Microsoft and Nvidia, marking significant milestones for these tech leaders).

Listen to this week’s podcast for further insights.