November CPI Misses, But Core Pressure Lingers: Fed Policy Implications for Growth Outlook

Earlier this week, markets priced in an 87% likelihood of a December Fed rate cut as investors awaited November jobs and services data, treating the pre-release period with cautious optimism amid mixed economic signals. That optimism was briefly reinforced when December's headline CPI came in at 2.9% annually, a touch below expectations, fueled partly by a 4.3% spike in energy costs despite a 3.9% annual decline in the broader index. The S&P 500 futures surged 1.45% on the news, reflecting a 'Goldilocks' interpretation that the report might secure dovish policy without stoking new inflation fears.

Yet beneath the surface, persistent core inflation concerns linger. The Kalshi market, a platform for inflation speculation, now shows a 21% probability that core CPI (excluding food and energy) will exceed 3.1% by November 2025. This reflects ongoing nervousness about underlying price pressures, particularly as the energy component's volatility has masked slower progress in services and shelter costs. The divergence between the headline number and Kalshi's forecast suggests investors remain wary that inflation stickiness could force the Fed to delay or scale back rate cuts, prioritizing its credibility over market enthusiasm.

Shelter Costs and Medical Services Anchor Core Inflation

U.S. core inflation remains elevated despite overall moderation, with shelter costs rising 3.6% year-over-year and medical services surging 3.9% YoY according to BLS data. These components defy the Federal Reserve's 2.5% core PCE inflation target for 2025 as outlined in the Federal Reserve's 2025 MPR, creating tension between current data and policy expectations. The persistent pressure in housing and healthcare markets underscores why core inflation is described as "eased but stubborn"-moderation in some sectors contrasts sharply with stubborn increases in essentials.

Energy prices further complicate this picture. While the Fed projects subdued inflation, annual energy costs jumped 2.8% YoY in November, directly conflicting with the central bank's optimistic forecast. This divergence highlights measurement contradictions: policymakers rely on forward-looking models, while real-time data shows energy and shelter acting as inflationary anchors.

The Fed's gradual rate-cutting path hinges on whether these components soften. Medical services inflation, driven by pricing power in provider networks, and shelter costs, exacerbated by tight rental markets, remain structural challenges. Even as broader inflation trends downward, these sectors risk delaying monetary policy normalization. The tension between current data and forecasts suggests policymakers must balance vigilance against complacency as they navigate this complex backdrop.

Fed Policy Pathway: Gradual Cuts Expected, But Data Dependence Remains

The Fed's upcoming December rate decision faces immediate pressure from November's inflation surprise, complicating the path to its 2.5% core PCE target. November's 3.0% annual reading, fueled by a sharp 2.8% energy price jump, now sits starkly above the central bank's projected 2.5% for 2025, creating significant tension in policy calibration. While November's data confirms persistent inflation, the outlook remains deeply intertwined with stubborn core services, particularly shelter costs, which have consistently driven CPI readings higher throughout 2025. This disconnect between forecasted moderation and actual core inflation readings raises the stakes for the December meeting.

Despite the November uptick, the Fed's baseline forecast, anticipating inflation cooling towards its target by year-end, still points to a near-term rate cut to 3.9% in December. Participants view 2025 inflation as marginally above target but trending downward, suggesting they see room for cautious easing. However, this path hinges critically on seeing meaningful, sustained progress on core services inflation. Persistent shelter costs, a hallmark driver identified in September's CPI report, combined with volatile energy prices, create a formidable barrier to achieving the desired disinflation trajectory. The Fed's projected cuts through 2026-2027 remain conditional on core inflation, especially services, showing clear improvement. If core services inflation proves stickier than expected, as historical data suggests it often does, the central bank may need to delay further easing, potentially keeping rates elevated longer than current projections imply.

Therefore, the Fed's December move will likely be modest, reflecting the tension between the November inflation spike and the longer-run forecast. The central bank will undoubtedly emphasize its data-dependence, particularly watching the upcoming November CPI release scheduled for December 18th for clues on whether shelter and energy pressures are subsiding. The risk of delayed rate cuts beyond 2026-2027 looms large if core services inflation, the most persistent component identified in recent CPI reports, fails to show decisive improvement. The Fed's willingness to cut hinges less on headline volatility and more on demonstrable, sustainable progress in lowering core services inflation towards its 2.5% goal.