the pace of consumer inflation is expected to have fallen slightly in december from the prior month because of a sharp drop in gasoline and energy prices but the annual rate is still likely to remain uncomfortably high according to dow jones economists now expect a decline of 01 in the consumer price index on a monthly basis but inflation is still expected to climb at a 65 rate from the prior year that compares to a gain of 01 in november and a 71 pace over year ago however the cpi is well off the 91 peak rate in june technical analysts agree januarys strong start is a good omen but heres what they expect to happen next core cpi excluding energy and food is expected to be up 03 in december gaining 57 on a yearoveryear basis core cpi rose 02 in november and 6 on a yearly basis we welcome it with open arms its good news said kpmg chief economist diane swonk of the expected decline its great and it helped to fuel consumer spending in the fourth quarter but its still not enough the consumer price index is expected thursday at 830 am et and it is the final cpi report before the federal reserves feb 1 interest rate decision for that reason the inflation number has become a major event for financial markets and now some traders are betting it will show inflation slowing even more than economists forecast they also point to weakerthanexpected wage growth in decembers jobs report as well as other data that shows lower inflation expectations stocks rallied on wednesday ahead of the report the market is looking at it as glass half full inflation is rolling over and the fed is almost done raising interest rates said peter boockvar chief investment officer at bleakley financial group i think they remember the last two months when you had numbers that were well below expectations theyre just assuming thats going to be the case again in the futures market traders continued to bet that the fed will raise rates by just a quarter point at its next meeting meanwhile some economists continue to expect the central bank will increase its fed funds target rate by a half percentage point market expectations are just 20 for a 50 basis point hike a basis point equals 001 of a percentage point its amazing how much reaction and overreaction there is for one single data point said simona mocuta chief economist at state street global advisors clearly the cpi is very important in this particular case it does have fairly direct policy implications which are about the size of the next fed rate hike mocuta said a cooler cpi should influence the fed the market has not priced the full 50 i think the market is right in this case she said the fed can still contradict the market but what the market is pricing is the right decision wilmington trust chief economist luke tilley said a 12 decline in gasoline prices in december and other decreases in energy prices for expenses like home heating helped drive inflation lower shelter is the main focus because of the lag he said rental market data shows a slowing in rates but the cpi has not yet reflected it everyone is familiar with the lag that it takes for the data to show up in the cpi tilley added we think there could be a sharper slowdown shelter costs are 40 of core cpi shelter is expected to be up 06 month over month tilley said with the decline in the real estate market he is hearing from landlords that they are having a more difficult time raising rents were penciling in slower increases in january and february and march on that shorter lag he said economists are watching closely to see how much inflation related to services rises in cpi since goods inflation is expected to continue to come down now that supply chains are operating more normally the headline monthly changes over the last two three months overstate the improvement were not going to get the same help from gasoline in the next report i dont want to see an acceleration in shelter i want to see some of the discretionary areas show deceleration said state streets mocuta i think right now the focus is very much on the services side the market is laserfocused on inflation since the feds progress in fighting it could determine how far the central bank will go on its rate hiking path the feds rate hikes are slowing the economy and how much more the central bank moves could be the difference between a soft landing or a recession the hope is that basically we are now in a position where you could envision a soft landing that requires the fed to not only stop raising rates but ease up sooner and that doesnt seem to be where theyre at said swonk the fed is hedging a different bet than the markets are this is where nuance is really hard youre in this position where youre improving its like a patient is getting better but theyre not out of the hospital yet the fed funds rate range is currently at 425 to 45 and the fed has forecast a final high rate of 51 for this year the fed is also worried about a second round of supply shock whether its chinas abrupt abandonment of its zerocovid policy or something else from russia they dont want to declare victory too soon said swonk theyre making that very clear theyve said it over and over again and nobody listens economists expect another key metric the personal consumption expenditure deflator could show core inflation slowing even below the feds forecast of 35 by the end of this year some economists who expect a recession predict that the central bank will have to cut interest rates before year end as the markets expect but the fed has no forecast for rate cuts until next year some strategists expect fed officials to begin to sound more dovish and less at odds with the market view boston fed president susan collins said in an interview with the new york times on wednesday that she was leaning toward a quarterpoint hike at the next meeting we think one of the changes in coming months is the fed will soon realize it is cheaper to change the inflation narrative than reverse a recession leading to millions of lost jobs writes fundstrat founder tom lee in a note wednesday