As the Federal Reserve prepares for its December 17–18 meeting, November's CPI data—due tonight—will serve as a critical reference point for shaping the Fed's upcoming rate decisions and policy trajectory.
Analysts widely anticipate that November CPI will show a year-over-year increase of 2.7%, up from 2.6% in October, while the month-over-month growth is expected to accelerate from 0.2% to 0.3%. Core CPI, which excludes food and energy prices, is forecast to rise 3.3% YoY and 0.3% MoM, consistent with the previous month. This keeps core inflation well above the Fed's 2% target and within a 3.2%–3.3% range for the sixth consecutive month.
A softer-than-expected CPI print could boost the likelihood of a rate cut in December while pressuring the U.S. dollar. Conversely, stronger-than-expected data could dampen expectations for deeper 2025 rate cuts, potentially supporting the greenback.
Inflation Slowdown Faces Challenges
The Cleveland Fed's inflation model forecasts November's headline CPI to rise 0.26% MoM and 2.7% YoY, closely aligning with market expectations. Core CPI is projected to grow 0.27% MoM and 3.3% YoY.
Goldman Sachs analysts predict core CPI will climb 0.28% MoM, driven by increases in categories such as used cars, airfares, apparel, and auto insurance.
- Used Cars: Prices are expected to rise 2.0% in November, moderating from October's 2.7%, as wholesale price increases ripple through the retail market.
- Auto Insurance: Growth is projected to slow to 0.5% MoM, though the upward trend remains.
- Housing Costs: Owner-equivalent rent (OER) is forecast to rise 0.33% MoM, slightly below October's 0.40%, while overall rent prices may remain steady at 0.28% MoM.
Despite progress in cooling inflation, Wells Fargo economists warn that achieving the Fed's 2% inflation target by 2025 appears increasingly challenging. Risks of inflation resurgence remain, partly driven by higher consumer inflation expectations. According to the New York Fed's latest survey:
1-Year Inflation Expectations: Up to 3.0% (from 2.9%).
3-Year Expectations: Rose to 2.6% (from 2.5%).
5-Year Expectations: Edged up to 2.9% (from 2.8%).
Fed's Rate Cut Path: Limited Flexibility?
Swaps markets price an 86% probability of a 25-basis-point rate cut at the December meeting, with only a 14% chance of the Fed holding rates steady. However, expectations for 2025 rate cuts remain subdued, with less than 50 basis points of easing projected, diverging from the Fed's September dot plot forecasting 100 basis points of cuts next year.
While near-term economic cooling supports further rate cuts, wage inflation resilience and rising consumer inflation expectations could limit medium-term easing. Concerns over potential fiscal stimulus under a Trump presidency may also constrain the Fed's flexibility.
A Game-Changing CPI Report?
Matthew Weller, Head of Research at GAIN Capital, notes that inflation has remained sticky at around 3% after significant declines in 2022 and 2023. Most Fed officials have signaled readiness for a December cut, but tonight's CPI could still reshape expectations if it deviates significantly from forecasts.
Morgan Stanley analysts suggest that November CPI is unlikely to meaningfully alter the Fed's course. They argue that only extreme surprises in the data would prompt a strategic shift, and a 25-basis-point cut in December remains highly probable regardless of tonight's numbers.
In conclusion, while November CPI is expected to confirm a slowing inflation cooldown, the Fed's focus remains on balancing growth and price stability as it approaches its final rate decision of the year.