After Friday’s better-than-expected December jobs report showing both a strong labor market and softening wage pressures, the economic focus turns this week once again to inflation.

On Thursday, the Labor Department will release the consumer price index for December. Analysts are hoping it will reinforce November’s positive trendline of receding inflation with a year-over-year number of 6.7% compared to 7.1% in November. Expectations are that the core rate excluding food and energy will be 5.6% annually, down from 6%.

Then the question on the minds of Wall Street and economists will be whether the Federal Reserve sticks with another 50 basis point increase in interest rates when it meets in early February or if it steps down to a quarter point hike.

Still, the report gave ammunition to those who believe there is light at the end of the interest rate hike tunnel, even though the Fed has taken pains to insist it is committed to keeping rates high until inflation is clearly headed back down to its target averaging 2% annually.

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“Overall, this report should serve to reassure the Fed that an ongoing slowdown in the pace of monetary policy tightening – featuring a 25bps rate hike in early February – is appropriate, although expectations of a dovish pivot would still be misguided,” Gregory Daco, EY Parthenon chief economist, said on Friday after the jobs report.

“Since we expect inflation will cool faster than consensus and Fed expectations, we continue to anticipate a 25bps hike in early February and another 25bps increase in mid-March – at which point we anticipate the Fed will pause its tightening cycle at 4.75-5.00%,” Daco added. “We believe a couple of rate cuts remain a distinct possibility in late 2023 as a recalibration exercise.”

The Fed raised rates seven times in 2022, more than 4% in total, yet began to take the foot off the accelerator in December. That means the central bank is closer to the end of its cycle than the beginning. At the same time, the slowing economy and improved supply chains are yielding meaningful declines in the price of housing, durable goods and energy costs.

It’s a setup that some believe could lead to a faster fall in inflation and weaker headwinds to growth from the Fed. That clearly was behind Friday’s 700-point jump in the Dow Jones Industrial Average.

Wells Fargo says the good news on inflation likely continued in December, with the price of a gallon of gasoline dropping by nearly 13% and food prices moderating, as well as slack demand leading to excess inventories of items such as furniture and apparel. Rents, meanwhile, are starting to come off their peaks, although that will not show up for a while in the government’s price index.

“Bottom line, we look for the December CPI report to show another positive performance on the inflation front,” Sam Bullard, managing director and senior economist at Wells Fargo Corporate and Investment Banking, wrote on Sunday.

“If realized, some Fed officials may begin to take this as ‘compelling’ evidence of easing price pressures which could warrant another downshift in the pace of rate hikes at the next FOMC meeting (Feb. 1) and ultimately pausing hikes altogether in the near term,” Bullard added.

That does not mean a return to the glory days of low interest rates that predated the arrival of the coronavirus and the stimulation of the economy that followed it, according to former Treasury Secretary Larry Summers.

“This is going to be remembered as the year when we recognized that we were heading into a different kind of financial era with different kinds of interest rate patterns,” Summers told Bloomberg on Friday.

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