Upcoming economic data is poised to reveal a frustrating reality: while inflation has cooled significantly from its peak, progress in bringing it down to the Federal Reserve’s target of 2% has essentially stalled. The Consumer Price Index (CPI) report, due Wednesday, is expected to show a slight uptick in inflation, signaling that the fight against rising prices is far from over. While the Federal Reserve is still anticipated to lower interest rates next week, the persistent inflation remains a significant challenge for consumers and the economy, raising questions about the Fed’s future monetary policy decisions and the overall economic outlook.
Inflation Stalls Progress, But Fed Rate Cut Still Expected
Key Takeaways:
- CPI Expected to Show Slight Uptick: The upcoming CPI report is projected to show a 2.7% annual inflation rate for November, a 0.1 percentage point increase from October, indicating that inflation’s descent has plateaued.
- Core Inflation Remains Elevated: Core inflation (excluding volatile food and energy prices) is forecast to remain unchanged at 3.3%, further underscoring the persistent inflationary pressures in the economy.
- Fed Rate Cut Likely Despite Inflation: Despite the stalled progress on inflation, futures markets strongly indicate an almost certain quarter-percentage-point cut in the Fed’s benchmark interest rate at its December meeting.
- Underlying Concerns Remain: Economists caution that the persistent inflation, coupled with the potential impact of incoming President Trump’s planned tariffs, poses significant challenges for the economy in the coming year.
- Uncertainty on Future Fed Policy: The relatively high inflation combined with near 3% macro growth, creates an unconventional circumstance for the Fed which typically uses higher interest rates to combat inflation. The market’s expectation for further rate cuts beyond December remains uncertain.
The upcoming Wednesday release of the Consumer Price Index (CPI) report will paint a crucial picture of the nation’s inflationary landscape. The Dow Jones consensus anticipates a 12-month inflation rate of 2.7% for November, representing a marginal increase of 0.1 percentage points compared to October. This slight acceleration, however small, suggests that the aggressive measures undertaken by the Federal Reserve to curb rising prices may be losing some of their effectiveness. Furthermore, the projected core inflation rate of 3.3% – which excludes the more volatile food and energy components – remains considerably above the Fed’s target of 2%, reinforcing concerns about persistent inflationary pressure within the broader economy.
Economists offer varied perspectives on these developments. Dan North, senior economist at Allianz Trade Americas, aptly captured the sentiment: “**Looking at these measures, there’s nothing in there that says the inflation dragon has been slain.** **Inflation is still here, and it doesn’t show any convincing moves towards 2%.**” This assessment highlights the fact that while inflation has undoubtedly decreased from its peak of around 9% in June 2022, the lingering elevated prices continue to pose a significant challenge for many U.S. households, especially those with lower incomes. The cumulative impact of these price increases has been substantial and enduring.
The upcoming Producer Price Index (PPI) report on Thursday, which gauges wholesale price changes, is expected to provide further insight into inflationary trends. Projected at a 0.2% monthly gain, the PPI report will complement the CPI data, offering a more comprehensive view of the price pressures faced by both consumers and businesses.
Despite the somewhat disappointing inflation figures, the financial markets overwhelmingly anticipate that the Federal Reserve will proceed with another interest rate cut of 0.25 percentage points at its upcoming meeting on December 18th. The CME Group’s FedWatch tool indicates an 88% probability of a rate cut as of Tuesday morning. This market consensus points to a strong belief that the Fed will continue its course of monetary easing, even with inflation still running above its target.
North comments on the Fed’s likely approach: “**When the market is locked in like where it is today, the Fed doesn’t want to make a big surprise.** **So unless something has skyrocketed that we haven’t foreseen, I’m pretty sure the Fed is on a lock here.**” This suggests that the Fed is unlikely to deviate from its planned rate cut unless unforeseen economic shocks dramatically alter the outlook.
Analysts at Goldman Sachs have identified several key drivers behind the anticipated November CPI increase. These include a projected 2% monthly increase in car prices, a 1% rise in airfares, and a continuing upward trend in auto insurance costs, estimated at a 0.5% increase for November following a substantial 14% increase over the past year. These factors illustrate the complexity of inflation, with various sectors contributing to the overall price pressures.
However, Goldman Sachs’ analysis offers some cautious optimism, envisioning “**further disinflation in the pipeline over the next year**” due to anticipated easing in the autos, housing rental markets, and a softening labor market. Yet, this optimism is tempered by significant concerns. The incoming President elect Donald Trump’s planned tariffs represent a formidable headwind that could propel inflation higher again in 2025. Goldman projects core CPI inflation to ease to 2.7% in 2025, and the Fed’s preferred inflation gauge, the personal consumption expenditure index, to fall to 2.4%, both still substantially above the Fed’s target.
The combination of inflation projected to remain significantly above 2% coupled with macro economic growth near 3% constitutes an unusual scenario for the Fed. This normally isn’t an environment where the Fed would decrease interest rates. The expectation is that the Fed will skip the January meeting, possibly cutting again in March, and then perhaps making only one or two more cuts in the remainder of 2025. But the unconventional situation leaves lingering questions about the future course of monetary policy
North summarizes the situation well: “**Two percent to me doesn’t mean just touching 2% and bouncing along. It means hitting 2% for a continuous, foreseeable future, and none of that is evident in any of those reports.** **You don’t really want to cut in that environment.**” This perspective underscores the complexities faced by the Fed, which must balance the need to stimulate economic growth with the continued pressure to bring inflation down to its target level. The coming months will be crucial in determining how successfully the Fed and the economy navigate this delicate balance.
