•          The US Consumer Price Index is set to rise 3.2% YoY in December, up from November’s 3.1% increase.
•          Annual Core CPI inflation is expected to edge lower to 3.8% in December.
•          The US Dollar’s fate hinges on the CPI data amid dovish Fed expectations.

The high-impact US Consumer Price Index (CPI) inflation data for December will be published by the Bureau of Labor Statistics (BLS) on Thursday at 13:30 GMT. Inflation data could alter the market’s pricing of the Federal Reserve (Fed) interest rate cuts later this year, fuelling extreme volatility around the US Dollar (USD).

What to expect in the next CPI data report?

The US Consumer Price Index is forecast to rise at an annual pace of 3.2% in December, a tad quicker than the 3.1% increase reported in November. The Core CPI inflation, which excludes volatile food and energy prices, is set to fall to 3.8% in the same period, compared with the previous growth of 4.0%.

The monthly CPI and the Core CPI are seen increasing 0.2% and 0.3%, respectively.

In November, the US CPI numbers came in line with the market expectations, but the details of the report showed an uptick in the shelter index and used car and trucks index, which helped push back against the market’s pricing of Fed rate cuts next year.

Used car prices dropped 0.5% in December, dragging the Manheim Used Vehicle Index down 7.0% year-over-year (YoY), the monthly market report published by the auction house Manheim showed Tuesday.

Previewing the US December inflation report, “our forecasts for the December CPI report suggest core inflation slowed notably: we are projecting a “strong” 0.1% increase, notably down from 0.3% m/m in the last report,” said TD Securities analysts.

“Despite that, we look for strengthening in the headline to 0.2% m/m, as inflation won't be aided by falling energy prices this time around. In the details, the report is likely to show that the goods segment remained an important drag on core inflation, while the shelter components are expected to remain sticky,” the analysts added.

Meanwhile, the Prices Paid Index of the ISM Services PMI survey edged slightly lower to 57.4 in December from 58.3 a month earlier. The Prices Paid Index of the Manufacturing PMI dropped to 45.2 in December from 49.9 in November. These readings portrayed the continued softening of price pressures in the services sector, and signaled sharper price declines in the manufacturing industry.

As Fed officials maintained their data-dependent stance on monetary policy, the US CPI inflation data holds the key to gauging the timing and the pace of the Fed rate cuts, which could significantly influence the value of the US Dollar. The details of the report could also highlight the sticky parts of inflation.

Heading into the US CPI showdown, the CME Group FedWatch Tool shows that markets are pricing in a 66% probability of the Fed announcing rate cuts as early as March. “The Bloomberg's World Interest Rate Probability (WIRP) function suggests 5% odds of a cut on January 31 and rising to nearly 75% for the March 20 meeting after being nearly priced in at the start of last week. Five rate cuts are priced in vs. six at the start of last week, though there are still 50% odds of a sixth cut,” analysts at BBH noted.