Dive Brief:

• Inflation slowed last month, the Bureau of Labor Statistics said Wednesday, easing concerns of rebounding price pressures and halting a more than three-month rise in borrowing costs. 
• The core consumer price index excluding volatile food and energy prices edged up 0.2% in December compared with 0.3% the prior month, the bureau said. In response, the yield on the benchmark 10-year Treasury bond — which has increased since late September on mounting inflation worries — fell 0.138 percentage point Wednesday to 4.655%.
• “The softer core inflation will come as relief to many, reducing U.S. bond yields and, in a change from the last few months, putting downward pressure on yields around the world,” Mohamed El-Erian, chief economic advisor at Allianz, said in a post on X.

Dive Insight:

The Federal Reserve in September made the first of three rate cuts, reducing the federal funds rate by a full percentage point to a range between 4.25% and 4.5% by late December.

Since the start of monetary easing — amid signs of a stall in efforts by policymakers to restore inflation to their 2% target — the 10-year Treasury yield has broken with the historical norm and risen a percentage point.

While triggering a decline in yields, the Wednesday report on slowing inflation also prompted traders in interest rate futures to increase the odds that the central bank will trim the federal funds rate more than once this year to 50% from 35%, according to the CME FedWatch Tool.

“The process of disinflation remains in train,” New York Fed President John Williams said in a speech Wednesday, adding a note of caution. “We are still not at our 2% goal, and it will take more time until we can achieve that on a sustained basis.”

Energy prices surged 2.6% in December, fueling more than 40% of the 0.4% gain in the monthly increase in the CPI including fuel and energy, the BLS said. The prices of shelter, airline fares, used cars and trucks, and new vehicles also rose.

Shelter prices, tied in part to slow-changing rental rates, increased 4.6% in the 12 months through December, the BLS said.

The prices for personal care, communication and alcoholic beverages were among the few components that fell last month, the BLS said.

Producer prices, or what companies charge for goods and services, increased 0.2% last month compared with 0.4% in November, the BLS said Tuesday. The pace was slower than forecast.

“I still see continued progress” in the Fed’s fight against inflation, Chicago Fed President Austan Goolsbee said Wednesday during a webcast interview.

“It's important to take the long view on inflation,” he said. “It's a noisy series, so any one month, take with a grain of salt, multiple months take as being a trend, and the trend continues to be improvement.”