Dive Brief:
- Inflation edged up last month, underscoring the Federal Reserve’s challenge completing its nearly three-year campaign to slow the pace of price gains to its 2% target.
- The consumer price index rose at a 2.7% annual rate in November compared with 2.6% the prior month, the Bureau of Labor Statistics said Wednesday. Shelter prices increased 0.3% in November, fueling nearly 40% of the gains in CPI. Core CPI — excluding volatile food and energy prices — rose at a 3.3% annual rate.
- “We still expect the Fed to cut rates by 25 basis points next week,” analysts at Bank of America Securities said Wednesday in a report, referring to the central bank’s Dec. 17-18 policy meeting. “The firming of inflation in recent months does make a cut in January unlikely.”
Dive Insight:
Traders in interest rate futures were unfazed by the report Wednesday of persistent inflation. They raised the odds that policymakers will trim the main interest rate by a quarter point next week to 95% from 89% on Tuesday, according to the CME FedWatch Tool.
“The slight uptick [in inflation] is probably not an indicator of a change in trend,” Scott Helfstein, head of investment strategy at Global X, said in an email. He predicted the central bank will probably cut the federal funds rate next week by a quarter percentage point.
The Fed in 2025 will likely trim the main rate three or four times, he said, flagging risks to his forecast.
“Next year might prove to be a little more unsettling for prices with tariff increases impacting consumer prices and tax cuts fueling demand,” Helfstein said. “But price stability has returned for now.”
The price of used cars and trucks rose 2% in November compared with 2.7% in October, according to the BLS.
The rise in shelter costs, while slowing 0.1 percentage point last month compared with October, gained 4.7% on an annual basis. Fed officials have noted that shelter prices are comparatively “sticky,” rising and falling more gradually than other prices.
“The November numbers were softer than prior to the pandemic,” Bank of America Securities analysts said, referring to rents. “That may not persist in the near- or medium-term, but it appears that rents have finally taken that step down.”
Prices for household furnishings, medical care and recreation rose in November, the BLS said, whereas the index for communication was one of the few indexes that declined last month.
Inflation has slowed toward the Federal Reserve’s 2% target and, despite the highest interest rates in two decades, unemployment is at a comparatively low 4.2%.
The central bank, noting easing price pressures, trimmed the main interest rate by 0.25 percentage point last month and by 0.50 percentage point in mid-September.
