CPI report expected to show progress on inflation has hit a wall

A key economic report due out on Wednesday is expected to show that progress in reducing the inflation rate has stalled, although not enough that the Federal Reserve will not lower 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 trailing 12-month inflation rate of 2.7% in November, which would mark an acceleration from 0. 1 percentage points from the previous month, according to the Dow Jones. Jones consensus.

Excluding food and energy, so-called core inflation is forecast at 3.3%, or unchanged from October. Both measures are expected to show monthly increases of 0.3%.

With the Federal Reserve targeting 2% annual inflation, the report will provide further evidence that the high cost of living is largely still a reality for American households.

“Looking at these measures, there’s nothing there that says the inflation dragon has been slain,” said Dan North, senior economist at Allianz Trade Americas. “Inflation is still there and shows no convincing movement towards 2%.”

Along with Wednesday’s reading on consumer prices, the Bureau of Labor Statistics on Thursday will release its producer price index, a gauge of wholesale prices that is expected to show a 0.2% monthly gain.

To be sure, inflation has slowed considerably since its CPI cycle peak of around 9% in June 2022. However, the cumulative impact of price increases has been a burden on consumers, particularly those at the lower end. of the salary scale. The core CPI has been rising since July after showing a steady series of declines.

Still, traders in futures markets are placing big bets on authorities cutting their benchmark short-term borrowing rate again by a quarter of a percentage point when the Federal Open Market Committee concludes its meeting on Dec. 18. The odds of a cut were close to 88% as of Tuesday morning, according to CME Group’s FedWatch measure.

“When the market is locked down like it is today, the Fed doesn’t want to spring a big surprise,” North said. “So unless something triggered that we didn’t anticipate, I’m pretty sure the Fed is on the fence here.”

According to Goldman Sachs, November’s CPI rise likely came from a few key areas.

Car prices are expected to show a 2% monthly increase, while airfares are seen 1% higher, the company’s economists projected in a note. Additionally, the pesky rise in auto insurance, which rose 0.5% in November after posting a 14% increase over the past year, is likely to continue, Goldman estimated.

While the firm sees “further disinflation in the works over the next year” due to easing in the auto and home rental categories, as well as a weakening in labor markets, it is also concerned that the president-elect’s planned tariffs Donald Trump can keep inflation high in 2025.

Goldman projects that core CPI inflation will soften, but only to 2.7% next year, while the Federal Reserve’s target inflation gauge, the personal consumption expenditures price index, will move to 2.4 % in the base reading from its most recent level of 2.8%.

With inflation projected well above 2% and macroeconomic growth still close to 3%, this would not normally be an environment in which the Fed would make cuts. The Federal Reserve uses higher interest rates to curb demand, which in theory would force companies to lower prices.

Markets expect the Federal Reserve to skip the January meeting and possibly cut rates again in March. From there, the market price is for only one or at most two cuts during the rest of 2025.

“To me, two percent doesn’t just mean hitting 2 percent and moving on. It means hitting 2 percent for a continuous, foreseeable future, and none of that is evident in any of those reports,” North said. “In that environment, you really don’t want to cut.”