Inflation rose for the second straight month, but investors remain confident in a December rate cut.
The Consumer Price Index (CPI) rose to 2.7% in November, up from 2.6% the previous month.
This is the second straight month that the CPI inflation rate has gone up, as the CPI jumped to 2.6% in October from 2.4% in September.
With the Federal Open Market Committee (FOMC) meeting next week on the federal funds interest rate, investors are wondering if this inflation news changes the Fed’s calculus.
Rising inflation not unexpected
The inflation rate had declined for five straight months, from 3.5% in March to 2.4% in September, which led to a massive 50 basis point Fed rate cut in September followed by another 25-basis point cut in November.
But the CPI has hit a wall, rising over the past two months back up to 2.7%. Core inflation, which excludes food and energy prices, stayed the same in November, climbing 3.3% over the past 12 months.
Both the CPI and core inflation for November were in line with expectations, so the November results did not come as a surprise to investors. In fact, the major indexes were all moving higher at the opening bell on Wednesday, with the S&P 500 up about 30 points, or 0.5%, the Nasdaq rising 180 points, or 0.9%, and the Dow jumping 75 points, or 0.2%.
In the month of November, the CPI rose 0.3%, the highest monthly gain in six months. This was in line with estimates.
The price for shelter rose 0.3% in November, while the food index rose 0.4%. The food at home index increased 0.5% while the food away from home index rose 0.3%. In addition, the energy index climbed 0.2%, while commodities and services both increased 0.3%.
Drilling down, shelter, used cars and trucks, household furnishings and operations, medical care, new vehicles, and recreation all rose last month. Prices in the communication index were among the few major indexes that decreased in November.
Over the last 12 months, food prices are up 2.4% while energy costs are down 3.2%. Within energy, energy commodities are down 8.5% while energy services are up 2.8%. Commodities less food and energy prices are 0.6% lower while services less energy are up 4.6%. Within services, shelter is up 4.7% over the past 12 months.
What does this mean for the Fed?
The FOMC meets next Tuesday and Wednesday to decide on interest rates and experts seem confident that the Fed will lower rates by another 25 basis points, to the 4.25% to 4.50% range.
“The CPI print confirms the market consensus of another 25bps rate cut from the Federal Reserve,” Josh Hirt, Vanguard senior U.S. economist, said. “We are still closely monitoring the strength of the labor market and potential stickiness of certain components of inflation (shelter, services) heading into 2025.”
Despite the rising inflation numbers, core inflation was unmoved — and that is seen as a positive. Also, the November jobs report, which came out last week, was better than expected, as 277,000 jobs were added, and September and October jobs numbers were revised upward. Also, hourly earnings rose 0.4% in November and 4% over the past 12 months.
“First, [it means] that the gains could continue to help consumer wallets and confidence adapt to the higher price levels brought on by recent years’ inflation pressures,” Elyse Ausenbaugh, head of investment strategy at J.P. Morgan Wealth Management, said. “Second, [it means] that it doesn’t need to shift the Federal Reserve’s focus on recalibrating their policy stance.”
Ausenbaugh added that jobs report “bolsters our call on the Fed’s policy path from here … A cut in December looks likely, followed by four cuts in 2025 at an every-other-meeting cadence.”
Interest rate traders seem to agree, as the CME FedWatch gauge puts the likelihood of a 25 basis point cut next week at 97.7%.
