Evelyn Reynolds

The consumer price index showed a 12-month inflation rate of 2.7% after increasing 0.3% on the month.
Excluding food and energy costs, the core CPI was at 3.3% on an annual basis and 0.3% monthly. All of the figures were in line with forecasts.
The report further solidified the market outlook for a cut, with traders raising the odds to 99%, according to the CME Group’s FedWatch measure.

Consumer prices rose at a faster annual pace in November, a reminder that inflation remains an issue both for households and policymakers.
The consumer price index showed a 12-month inflation rate of 2.7% after increasing 0.3% on the month, the Bureau of Labor Statistics reported Wednesday. The annual rate was 0.1 percentage point higher than October.

Excluding food and energy costs, the core CPI was at 3.3% on an annual basis and 0.3% monthly. The 12-month core reading was unchanged from a month ago.

All of the numbers were in line with the Dow Jones consensus estimates.
The readings come with Federal Reserve officials mulling over what to do at their policy meeting next week. Markets strongly expect the Fed to lower its benchmark short-term borrowing rate by a quarter percentage point when the meeting wraps up Dec. 18, but then skip January as they measure the impact successive cuts have had on the economy.
The report further solidified the market outlook for a cut, with traders raising the odds to 99%, according to the CME Group’s FedWatch measure. Odds of a January reduction also edged higher, hitting about 23%.
“In-line core inflation clears the way for a rate cut at next week’s [Federal Open Market Committee] meeting,” said Whitney Watson, global co-head and co-CIO for fixed income at Goldman Sachs Asset Management. “Following today’s data the Fed will depart for the holiday break still confident in the disinflation process and we think it remains on course for further gradual easing in the new year.”

While inflation is well off the 40-year high it saw in mid-2022, it remains above the Fed’s 2% annual target. Some policymakers in recent days have expressed frustration with inflation’s resilience and have indicated that the pace of rate cuts may need to slow if more progress isn’t made.
If the Fed follows through with a reduction next week, it will have taken a full percentage point off the federal funds rate since September.
Much of the November increase in the CPI came from shelter costs, which rose 0.3% and have been one of the most stubborn components of inflation. Fed officials and many economists expect housing-related inflation to ease as new rental leases are negotiated, but the item has continued to increase each month.
A measure within the shelter component that asks homeowners what they could get in rent for their properties increased 0.2%, as did the actual rent index. They are the smallest monthly respective increases since April and July 2021.
The BLS estimated that the shelter item, which has about a one-third weighting in the CPI calculation, accounted for about 40% of the total increase in November. The shelter index rose 4.7% on a 12-month basis in November.
Used vehicle prices rose 2% monthly while new vehicle prices increased 0.6%, reversing the recent trend that has seen those items come down.
Elsewhere, food costs rose 0.4% monthly and 2.4% year over year, while the energy index increased 0.2% but was down 3.2% annually. Within food, the measure of cereals and bakery products fell 1.1% in November, the single biggest monthly decline in the measure’s history going back to 1989, according to the BLS.
The increase in the CPI meant that average hourly earnings for workers were basically flat for the month when adjusted for inflation, but increased 1.3% from a year ago, the BLS said in a separate release.

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The consumer price index is expected to show a 2.7% 12-month inflation rate for November, up one-tenth of a percentage point from October. Core CPI is forecast at 3.3%, or unchanged from October.
Traders in futures markets nevertheless are placing huge odds that policymakers again will cut their benchmark short-term borrowing rate by a quarter of a percentage point.
The report will be released Wednesday at 8:30 a.m. ET.

A man shops at a Target store in Chicago on November 26, 2024.
Kamil Krzaczynski | AFP | Getty Images

A key economic report coming Wednesday is expected to show that progress has stalled in bringing down the inflation rate, though not so much that the Federal Reserve won’t lower interest rates next week.
The consumer price index, a broad measure of goods and services costs across the U.S. economy, is expected to show a 2.7% 12-month inflation rate for November, which would mark a 0.1 percentage point acceleration from the previous month, according to the Dow Jones consensus.

Excluding food and energy, so-called core inflation is forecast at 3.3%, or unchanged from October. Both measures are projected to show 0.3% monthly increases.

With the Fed targeting annual inflation at 2%, the report will provide more evidence that the high cost of living remains very much a fact of life for U.S. households.
“Looking at these measures, there’s nothing in there that says the inflation dragon has been slain,” said Dan North, senior economist at Allianz Trade Americas. “Inflation is still here, and it doesn’t show any convincing moves towards 2%.”
Along with the read Wednesday on consumer prices, the Bureau of Labor Statistics on Thursday will release its producer price index, a gauge of wholesale prices that is projected to show a 0.2% monthly gain.

Halting progress, but more cuts

To be sure, inflation has moved down considerably from its CPI cycle peak around 9% in June 2022. However, the cumulative impact of price increases has been a burden to consumers, particularly those at the lower end of the wage scale. Core CPI has been drifting higher since July after showing a steady series of declines.

Still, traders in futures markets are placing huge odds that policymakers again will cut their benchmark short-term borrowing rate by a quarter of a percentage point when the Federal Open Market Committee concludes its meeting Dec. 18. Odds of a cut were near 88% on Tuesday morning, according to the CME Group’s FedWatch measure.

“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.”
The CPI increase for November likely came from a few key areas, according to Goldman Sachs.
Car prices are expected to show a 2% monthly increase, while air fares are seen as 1% higher, the firm’s economists projected in a note. In addition, the nettlesome increase in auto insurance is likely to continue, rising 0.5% in November after posting a 14% increase over the past year, Goldman estimated.

More trouble ahead

While the firm sees “further disinflation in the pipeline over the next year” from easing in the autos and housing rental categories, as well as softening in the labor markets, it also worries that President-elect Donald Trump’s planned tariffs could keep inflation elevated in 2025.
Goldman projects core CPI inflation will soften, but just to 2.7% next year, while the Fed’s target inflation gauge, the personal consumption expenditures price index, will move to 2.4% on the core reading from its most recent 2.8% level.
With inflation projected to run well above 2% and macro economic growth still running near 3%, this wouldn’t normally be an environment in which the Fed would be cutting. The Fed uses higher interest rates to curb demand, which theoretically would force businesses to lower prices.
Markets expect the Fed to skip the January meeting then possibly cut again in March. From there, market pricing is for only one or at most two cuts through the rest of 2025.
“Two percent to me doesn’t mean just touching 2% and bouncing along. It means hitting 2% for a continuous, foreseeable future, and none of that is evident in any of those reports,” North said. “You don’t really want to cut in that environment.” More

Households expecting their financial situation to be better a year from now jumped to 37.6%, the highest since before the Covid pandemic, a New York Fed survey shows.
The median expectation for growth in government debt was at 6.2%, down 2.3 percentage points from October and the lowest level since February 2020.

U.S. President-elect Donald Trump holds an award during the FOX Nation’s Patriot Awards at the Tilles Center on December 05, 2024 in Greenvale, New York.
Michael M. Santiago | Getty Images

Optimism about household finances hit a multiyear high following Donald Trump’s presidential election victory in November, according to a New York Federal Reserve survey released Monday.
Households expecting their financial situation to be better a year from now jumped to 37.6%, an increase of about 8 percentage points from October, the central bank’s survey of approximately 1,300 heads of households showed. That was the highest reading since February 2020, just before the Covid-19 pandemic hit.

In conjunction with the rise of optimism, the level of those who expect their financial situation to get worse moved down to 20.7%, off nearly 2 percentage points from a month ago and the lowest since May 2021.
The results follow Trump’s Nov. 5 victory, which will send him back to the White House for a second, nonconsecutive term. The Republican has promised a menu of lower taxes and deregulation to boost growth.
Though the macro economy has shown solid growth through 2024, consumers remain stymied by price increases that spurred a cumulative increase in the consumer price index inflation gauge of more than 20% under President Joe Biden.
Even with the increase in sentiment, consumers’ inflation outlook is still cautious, according to the New York Fed survey.
Inflation expectations at the one-, three- and five-year horizons all increased 0.1 percentage point, rising to 3%, 2.6% and 2.9%, respectively. The Fed targets inflation at 2% but is still expected to lower its benchmark interest rate by a quarter percentage point when it meets next week.
Though Trump has made little mention of attacking the government’s debt and deficit load, the outlook there improved as well. The median expectation for growth in government debt was at 6.2%, down 2.3 percentage points from October and the lowest level since February 2020. More

The not-too-hot, not-too-cold nature of the November nonfarm payrolls release gave the central bank whatever remaining leeway it may have needed to cut interest rates.
Whether it should, and what it does from there, is another matter.
“There’s no reason to cut rates right now. They should pause,” said economist Joseph LaVorgna, who served as a senior economist during President-elect Donald Trump’s first term.
The only thing left on the docket that could dissuade the Fed from a December cut is the release next week of separate reports on consumer and producer prices.

Jerome Powell, chairman of the US Federal Reserve, during the New York Times DealBook Summit at Jazz at Lincoln Center in New York, US, on Wednesday, Dec. 4, 2024.
Yuki Iwamura | Bloomberg | Getty Images

Friday’s jobs report virtually cements that the Federal Reserve will approve an interest rate cut when it meets later this month. Whether it should, and what it does from there, is another matter.
The not-too-hot, not-too-cold nature of the November nonfarm payrolls release gave the central bank whatever remaining leeway it may have needed to move, and the market responded in kind by raising the implied probability of a reduction to close to 90%, according to a CME Group gauge.

However, the central bank in the coming days is likely to face a vigorous debate over just how fast and how far it should go.
“Financial conditions have eased massively. What the Fed runs the risk of here is creating a speculative bubble,” Joseph LaVorgna, chief economist at SMBC Nikko Securities, speaking on CNBC’s “Squawk Box,” said after the report’s release. “There’s no reason to cut rates right now. They should pause.”
LaVorgna, who served as a senior economist during Donald Trump’s first presidential term and could serve in the White House again, wasn’t alone in his skepticism about a Fed cut.
Chris Rupkey, senior economist at FWDBONDS, wrote that the Fed “does not need to be tinkering with measures to boost the economy as jobs are plentiful,” adding that the central bank’s stated intention to keep reducing rates looks “to be increasingly unwise as the inflation fire has not been put out.”
Appearing along with LaVorgna on CNBC, Jason Furman, himself a former White House economist under Barack Obama, also expressed caution, particularly on inflation. Furman noted that the recent pace of average hourly earnings increases is more consistent with an inflation rate of 3.5%, not the 2% the Fed prefers.

“This is another data point in the no-landing scenario,” Furman said of the jobs report, using a term that refers to an economy in which growth continues but also sparks more inflation.
“I’ve no doubt the Fed will cut again, but when they cut again after December is anyone’s guess, and I think it will take more of an increase in unemployment,” he added.

Factors in the decision

In the interim, policymakers will have a mountain of information to plow through.
To start: November’s payrolls data showed an increase of 227,000, slightly better than expected and a big step up from October’s paltry 36,000. Adding the two month’s together — October was hampered by Hurricane Milton and the Boeing strike — nets an average of 131,500, or slightly below the trend since the labor market first started to wobble in April.
But even with the unemployment rate ticking up 4.2% amid a pullback in household employment, the jobs picture still looks solid if not spectacular. Payrolls still have not decreased in a single month since December 2020.
There are other factors, though.
Inflation has started ticking up lately, with the Fed’s preferred measure moving up to 2.3% in October, or 2.8% when excluding food and energy prices. Wage gains also continue to be robust, with the current 4% easily surpassing the pre-Covid period going back to at least 2008. Then there’s the issue of Trump’s fiscal policy when he begins his second term and whether his plans to issue punitive tariffs will stoke inflation even further.
In the meantime, the broader economy has been growing strongly. The fourth quarter is on track to post a 3.3% annualized growth rate for gross domestic product, according to the Atlanta Fed.
There’s also the issue of “financial conditions,” a metric that includes such things as Treasury and corporate bond yields, stock market prices, mortgage rates and the like. Fed officials believe the current range in their overnight borrowing rate of 4.5%-4.75% is “restrictive.” However, by the Fed’s own measure, financial conditions are at their loosest since January.
Earlier this week, Fed Chair Jerome Powell praised the U.S. economy, calling it the envy of the developed world and said it provided cushion for policymakers to move slowly as they recalibrate policy.
In remarks Friday, Cleveland Fed President Beth Hammack noted the strong growth and said she needed more evidence that inflation is moving convincingly toward the Fed’s 2% goal. Hammack advocated for the Fed to slow down its pace of rate cuts. If it follows through on the December reduction, that will equate to a full percentage point move lower since September.

Looking for neutral

“To balance the need to maintain a modestly restrictive stance for monetary policy with the possibility that policy may not be far from neutral, I believe we are at or near the point where it makes sense to slow the pace of rate reductions,” said Hammack, a voting member this year on the Federal Open Market Committee.
The only thing left on the docket that could dissuade the Fed from a December cut is the release next week of separate reports on consumer and producer prices. The consumer price index is projected to show a 2.7% gain. Fed officials enter their quiet period after Friday when they do not deliver policy addresses before the meeting.
The issue of the “neutral” rate that neither restricts nor boosts growth is central to how the Fed will conduct policy. Recent indications are that the level may be higher than it has been in previous economic climates.
What the Fed could do is enact the December cut, skip January, as traders are anticipating, and maybe cut once more in early 2025 before taking a break, said Tom Porcelli, chief U.S. economist at PFIM Fixed Income.
“I don’t think there’s anything in today’s data that would actually stop them from cutting in December,” Porcelli said. “When they lifted rates as much as they did, it was for a completely different inflation regime than we have right now. So in that context, I think Powell would like to continue the process of normalizing policy.”
Powell and his fellow policymakers say they are now casting equal attention on controlling inflation and supporting the labor market, whereas previously the focus was much more on prices.
“If you want until you see cracks from a labor market perspective and then you start to adjust policy down, it’s too late,” Porcelli said. “So prudence would really suggest that you start that process now.” More