Consumer inflation accelerated in November 2024 to 2.7% from 2.6%. Year-on-year core CPI was unchanged but sticky and even higher at 3.3%. Despite elevated consumer inflation rates, the chance of a 0.25% Federal Reserve interest rate cut on December 18 rose to 96.7% following the CPI release. With those odds, markets are reflecting that a December Fed rate cut is almost a sure thing.
November CPI Consumer Inflation Rates Are Elevated
The U.S. Bureau of Labor Statistics release of the November Consumer Price Index showed an acceleration in year-on-year total CPI to 2.7% from 2.6%. Although CPI consumer inflation rates have fallen, they are still not at the Fed’s 2% target, and year-on-year total CPI is unlikely to get back down to 2% until sometime in the first half of 2025. Meanwhile, year-on-year core CPI was unchanged and elevated at 3.3% in November.
Monthly consumer inflationary pressures were relatively modest, with both total and core CPI rising by 0.3% in November. Plus, CPI inflation rates are significantly lower than a year ago.
Despite the progress made in year-on-year CPI over the past year, rates remain above the Fed’s 2% long-term target. Other measures of consumer inflation, like the Personal Consumption Expenditures inflation report, continue to reflect above-target consumer inflation.
The elevated levels of consumer inflation are unlikely to deter the Fed from cutting interest rates further because slowing in the U.S. labor market is a growing concern for the Fed.
Fed Rate Cuts Expected Despite Elevated Inflation
The next Federal Reserve policy decision will be released on December 18, and Prestige Economics has been forecasting a 0.25% interest rate cut. This is also in line with market expectations.
Despite the acceleration in year-on-year total CPI and elevated, sticky year-on-year core CPI, the odds of a December 18 Fed rate cut increased after the CPI report release.
The CME Fed Watch Tool reflected an 87.8% chance of a 0.25% rate cut at 8:26 a.m. ET on December 11—just before the CPI report was released at 8:30 a.m. ET. The odds of no rate cut were at 12.2% at that time.
Following the release of the report at 8:31 a.m. ET, the CME FedWatch Tool odds of a 0.25% rate cut rose to 96.7%, while the odds of no rate cut fell to just 3.3%.
Lower Inflation and Lower Interest Rates Would Support Growth And Markets
With the prospect of easing inflation and lower interest rates, there are upside risks to economic growth, business activity, and business valuations in the year ahead.
With a 96.7% probability, financial markets are clearly expecting an interest rate cut on December 18. While elevated consumer inflation rates seem unlikely to end the Fed’s cycle of interest rate cuts, a great deal of attention will be paid to the Federal Open Market Committee’s projections for future growth, inflation, unemployment rates, and interest rates that will also be released on December 18. These FOMC forecasts are likely to reflect expectations of significant interest rate cuts in 2025 and 2026.
How do you expect elevated consumer inflation rates will impact Fed policy and FOMC member forecasts on December 18?
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