A man shops at a Target store in Chicago on November 26, 2024.
Kamil Krzaczynski | AFP | Getty Images
A major economic report due Wednesday is expected to show that progress in lowering inflation has stalled, but not to the point that the Fed will not cut interest rates next week.
The Consumer Price Index, a broad measure of the costs of goods and services across the U.S. economy, is expected to show a 2.7% 12-month inflation rate for November, representing an acceleration of 0.1 percentage point from the previous month, according to the Dow Jones Index. Jones consensus.
Excluding food and energy, so-called core inflation is expected to reach 3.3%, or unchanged from October. Both metrics are expected to show monthly increases of 0.3%.
With the Federal Reserve targeting annual inflation of 2%, the report will provide further evidence that rising costs of living remain a fact of life for American families.
“Given these measures, there is nothing to suggest that the inflation dragon has been slain,” said Dan North, chief economist at Allianz Trade Americas. “Inflation is still present, and is not showing any convincing moves towards 2%.”
Along with Wednesday's consumer price reading, the Bureau of Labor Statistics on Thursday will release the Producer Price Index, a measure of wholesale prices that is expected to show a monthly increase of 0.2%.
Stopping progress, but more cuts
To be sure, inflation has come down significantly from its peak in the CPI cycle at around 9% in June 2022. However, the cumulative effect of price increases has been a burden on consumers, especially those at the lower end of the wage scale. The core CPI has drifted higher since July after showing a steady series of declines.
However, traders in the futures markets are placing high odds that policymakers will again cut the benchmark interest rate on short-term borrowing by a quarter of a percentage point when the Federal Open Market Committee concludes its meeting on December 18. The probability of reduction was close to 88%. Tuesday morning, according to CME Group's FedWatch gauge.
“When the market is as closed as it is today, the Fed doesn't want to cause a big surprise,” North said. “So unless something picks up that we didn't expect, I'm sure the Fed is on a roll here.”
The increase in November's CPI likely came from a few key areas, according to Goldman Sachs.
Car prices are expected to show a 2% monthly increase, while airline ticket prices are expected to rise 1%, the company's economists forecast in a note. In addition, the alarming increase in auto insurance is likely to continue, as it rose 0.5% in November after posting a 14% increase over the past year, according to Goldman estimates.
More trouble to come
While the company expects “further contraction in the pipeline over the next year” from easing in the auto and housing rental categories, as well as a pullback in labor markets, it is also concerned that the tariffs planned by President-elect Donald Trump could keep inflation high. In the United States. 2025.
Goldman expects core CPI inflation to decline, but only to 2.7% next year, while the Fed's target inflation measure, the personal consumption expenditures price index, will move to 2.4% on the core reading from its recent level of 2.8%. .
With inflation expected to rise above 2% and macroeconomic growth remaining near 3%, this will not be an environment in which the Fed will cut interest rates. The Fed uses higher interest rates to reduce demand, which would theoretically force companies to lower rates.
Markets expect the Fed to skip its January meeting and likely cut interest rates again in March. Hence, the market is pricing in only one reduction or at least two reductions during the rest of 2025.
“2% to me doesn't just mean getting to 2% and jumping all the way around. It means getting to 2% in the ongoing, foreseeable future, and none of that is evident in any of those reports,” North said. “You don't really want to interrupt that environment.”