The Consumer Price Index report for November will be released on December 11. Inflation is down substantially from peak levels, the key question is when and if inflation will hit the Federal Reserve’s 2% annual target.
Inflation nowcasting from the Cleveland Federal Reserve. suggests that headline inflation may see another increase to a 2.7% annual rate, that would be an acceleration from October’s 2.6%. Core inflation, which excludes food and energy, may remain at 3.3%. That would be the same level as October. Fhe November CPI report may not be particularly reassuring to the Fed, but the jobs market will remain a significant factor in its thinking, too. Currently the Fed is expected to cut interest rates in 2025, but at a measured pace. The Fed has cut interest rates at their two most recent meetings.
The Potential Impact Of Tariffs On Inflation
Recently, President-Elect Donald Trump has stated that he intends to impose tariffs on China, Mexico and Canada in January 2025. Such tariffs, if imposed, are likely to raise prices on products from these countries. That could lead to an increase in inflation. But it’s not clear that the Fed will react to such a potential one-off increase with higher interest rates.
Minneapolis Fed President Neel Kashkari said on November 10 to CBS’ “Face The Nation”, that: “If somebody imposed a 1% tariff or a 10% tariff, you would think that that would increase prices of those goods either 1% or 10%. That’s pretty easy to model, and it shouldn’t have an effect long run on inflation. The challenge becomes, if there’s a tit for tat. And it’s one country imposing tariffs and then responses, and it’s escalating, that’s where it becomes more concerning, and, frankly, a lot more uncertain.”
As such if tariffs were imposed, they could slow progress to the Fed’s 2% inflation target, but its unclear that the Fed will react to what could be a one time price increase with higher interest rates.
The Impact Of Home Prices
Trends in home prices in the November inflation report will also be closely watched. Home prices carry a large weight in CPI inflation and recently home prices have continued to rise at almost a 5% annual rate as of October’s CPI report. That’s contributed to higher inflation given shelter’s weight of more than 36% in the CPI series. If home prices were to decline, as many expect, then inflation may move toward, or even below, the Fed’s 2% target, but there hasn’t been much evidence of that in recent CPI reports.
What To Expect From The Fed
The Fed’s December interest rate decision is balanced between an interest rate cut and holding rates steady, according to fixed income markets. The chance of a cut currently slightly more likely than not.
If inflation comes in slower than expected, then that may raise the chance of an interest rate cut on December 18. However, data from the jobs market will matter, too, and unexpected weakness could support a cut, even if inflation doesn’t show signs of returning to 2%.