Inflation Is Expected To Pick Up Again In November, But Will It Alter Fed's Rate Cut Plan?

Today's November Consumer Price Index (CPI) will be the latest test of the effectiveness of the Federal Reserve's current monetary policy. Of course, in addition to determining whether thesticky inflation posed a risk to the US economy last month, this broad indicator measuring the cost of goods and services in the US economy will also be the last macroeconomic data before the Fed's final interest rate decision of this year.

Currently, the market expects the overall inflation rate for November to be 2.7%, which is an increase of 0.1 percentage points from October's data, while the core inflation rate, excluding food and energy, is expected to be 3.3%, unchanged from October. However, both indicators are expected to show a monthly increase of 0.3%—under these circumstances, the overall CPI's single-month growth rate may be faster than the last report, while the core CPI is likely to record a 0.3% or higher increase for the fifth consecutive month.

In other words, the November price index will provide more evidence that high living costs remain a reality that American households have to face.

Looking at these measures, there's nothing in there that says the inflation dragon has been slain,said Dan North, senior economist at Euler Hermes.Inflation is still here, and it doesn't show any convincing moves towards 2%.

Specifically, the rise in service costs such as housing, insurance, and healthcare will continue to be key factors driving core inflation, and at the same time, due to the continued rebound in auction prices, used car prices, which saw the largest monthly increase in a year in October, may continue to rise in November. Meanwhile, the travel peak brought by Thanksgiving may also increase the impact of airfare prices on the monthly inflation increase. Goldman Sachs estimates that in November, airfare prices will rise by 1% month-on-month andreflect a strong underlying pricing trend.

However, Bank of America expects airfare prices to decline in the month, offsetting some of the impact of other price increases on core inflation.

After surging in each of the last three months, we expect airfares to fall by 1% month over month, which will be a swing in the contribution to core inflation from +3 basis points to -1 basis points,Bank of America economists Stephen Juneau and Jesse Park wrote in their forecast report.

Stalled Progress May Not Eliminate Possibilities Of Another Rate Cut

Although the forecast data indicates that the Fed's current monetary policy has almost stagnated in suppressing inflation, it cannot be denied that US inflation has significantly decreased from the peak of 9% in June 2022. Therefore, many futures market traders still believe that, under the current circumstances, there should still be some room for the US interest rates to decline, and most people are convinced that the US central bank's policymakers will lower the benchmark short-term borrowing rate by 25 basis points at the end of the meeting on December 18.

FedWatch's current data shows that the possibility of the Fed cutting rates next Tuesday is still over 80%.

When the market is locked in like where it is today, the Fed doesn't want to make a big surprise,North said.So unless something has skyrocketed that we haven't foreseen, I'm pretty sure the Fed is on a lock here.

In 2024, the Fed has cumulatively cut rates by 75 basis points.

The Fed's New Trouble: The Trump Administration

The last interest rate decision of 2024 may not have many variables, but no one dares to guarantee anything for 2025, especially after Trump takes office in January next year. Many believe that the fact that Donald Trump returns to the White House may make the US economic outlook and the Fed's future interest rate path more difficult to predict, as Trump's tariff plans may cause a significant rebound in inflation levels.

A series of policies proposed by Trump, including imposing high tariffs on imported goods, cutting taxes for businesses, and restricting immigration, are considered by economists to be potential factors that can push up inflation.

Goldman Sachs expects core CPI to decline in 2025, but only to a level of 2.7%, while the Fed's target inflation indicator, the personal consumption expenditure price index, will move from the recent 2.8% to 2.4%. At the same time, the US macro economy can maintain a growth rate of 3%, but in this macro environment,rate cutsare usually not a solution favored by the Fed.

Two percent to me doesn't mean just touching 2% and bouncing along. It means hitting 2% for a continuous, foreseeable future,North said:none of that is evident in any of those reports. And in the former case, the Fed will obviously not continue to cut rates.

Therefore, for 2025, the market expects the Fed to keep interest rates unchanged at the January meeting and then cut rates again in March. For the remaining nine months, the Fed may only have one or at most two rate cuts.

The disinflationary momentum is fading, and new headwinds (e.g., the potential for tariffs and tax cuts) have emerged that make the final leg of inflation's journey back to the Fed's 2% target look increasingly difficult,the economic team at Wells Fargo pointed out.