Dive Brief:

• Core inflation edged up last month, underscoring the Federal Reserve’s challenge in achieving a sustained decline in price pressures even after holding the benchmark interest rate at a 22-year high since July.
• The consumer price index excluding volatile food and energy prices rose 0.3% in November compared with 0.2% in October, the Labor Department said Tuesday. While improving since early this year, the core CPI index increased 4% on an annual basis for the second straight month, or twice the central bank’s 2% inflation target.
• “Fed officials continue to acknowledge the improvement in price pressures but have not gone so far as to say their mission of price stability has been accomplished,” Lindsey Piegza, chief economist and managing director at Stifel Financial, said in a report. “The market, meanwhile, has been preemptively calling for an end to rate hikes for the past two years and pricing in rate cuts that have yet to come to fruition.”

Dive Insight:

Fed Chair Jerome Powell — who is leading a two-day meeting of policymakers ending Wednesday — has noted progress in cooling inflation while keeping the possibility of an additional interest rate hike on the table.

“We are prepared to tighten policy further if it becomes appropriate to do so,” he said in a Dec. 1 speech. “It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance.”

Despite Powell’s comments and the fresh data on core CPI, traders in interest rate futures on Tuesday bet the Fed has stopped tightening. They set 98% odds that the Fed will leave the federal funds rate unchanged at a range between 5% and 5.25% at the end of their gathering on Wednesday, according to the CME FedWatch Tool.

Looking further ahead, traders see a 76% probability that the central bank will cut the main rate by a quarter-point or more at the end of a scheduled two-day meeting on May 1.

Consumer expectations for short-term inflation support Wall Street’s projections. Median one-year-ahead inflation expectations fell 0.2 percentage point last month to 3.4%, the lowest level since April 2021, the New York Fed said Monday.

Most economists predict that inflation will slow, with many maintaining predictions of a downturn even though gross domestic product expanded at a 5.2% annual rate during the third quarter, well beyond expectations.

Sixty percent of economists forecast a shallow recession next year, and 47% expect the Fed to begin trimming borrowing costs during the second quarter, according to a survey of chief U.S. economists at more than 20 financial institutions by the Securities Industry and Financial Markets Association.

“The U.S. economy is poised to remain positive but lose significant momentum from the third quarter’s outsized rise,” according to Piegza, chair of the SIFMA Economist Roundtable.

GDP growth on an annual basis will likely fall below 2% this quarter and slow further next year, she said, putting recession odds between 55% and 60%.

Core CPI rose last month on increases in the prices for shelter, transportation, used cars and trucks, and medical care services and commodities, the Labor Department said. Prices fell for apparel and new vehicles.

A 2.3% decline in energy costs, including a 6% slump in gas prices, held headline inflation to just a 0.1% increase for November and 3.1% for the 12 months through November, 0.1 percentage point less than during October and the lowest reading since March 2021.