An important economic report set to be released on Wednesday is expected to show that the Fed's progress in reducing inflation may have stalled.

The November CPI data will serve as the latest test for whether inflation's resurgence will threaten the US economy, coming after the Fed has cut rates by a cumulative 75 basis points in 2024 and is currently discussing the last rate decision of the year.

The report is scheduled to be released at 9:30 PM Beijing time on Wednesday, and the market expects to show that the overall inflation rate year-on-year will rise to 2.7%, slightly higher than October's 2.6%, with a month-on-month increase of 0.3%, also higher than October's 0.2%.

Excluding volatile costs such as food and gasoline, the core CPI is expected to rise by 3.3% year-on-year in November, marking the fourth consecutive month at this level, with the month-over-month growth also expected to match last month's 0.3%.

Given that the Federal Reserve has set the annual inflation target at 2%, this report will further demonstrate that the high cost of living remains an undeniable fact for American families.

Dan North, Senior Economist at Allianz Trade Americas, stated: "Looking at this data, there is no indication that the inflation dragon has been vanquished. Inflation persists, and there are no compelling signs of a move toward 2%."

In addition to the consumer price data to be released on Wednesday, the Bureau of Labor Statistics will also release the latest PPI index on Thursday, which is expected to grow by 0.2% month-over-month.

BlackRock's Chief Investment Officer for Global Fixed Income, Rick Rieder, wrote last Friday, "The Fed should be able to cut rates in December, but the latest CPI report now becomes another important milestone in the Fed's policy adjustment."

Inflation may remain stubborn.

However, it is certain that inflation has significantly declined from the CPI cycle peak of around 9% in June 2022. However, the cumulative impact of rising prices has become a burden for consumers, especially among those with lower wages. Core CPI has been steadily rising since July after a series of stable declines.

Due to rising costs of housing, insurance, and medical services, the core inflation rate remains persistently high. Used car prices may rise due to a rebound in auction prices, while economists remain divided on whether airfare prices will increase.

Goldman Sachs stated that the increase in CPI in November may stem from several key areas. The company's economists predicted that car prices are expected to rise by 2% month-over-month, while airfare prices are expected to rise by 1%. Additionally, the headache of rising auto insurance premiums may continue, with Goldman estimating a 0.5% increase in November, up 14% over the past year.

However, Bank of America believes that the increase in airfare prices will slow down. Bank of America economists Stephen Juneau and Jeseo Park wrote in a report, "After soaring every month for the past three months, we expect airfare prices to decline by 1% month-over-month, which will change the contribution to core inflation from +3 basis points to -1 basis points."

Due to falling airfare prices, these two individuals expect the core inflation rate to decline to 0.2% month-over-month, but they noted that this category remains extremely volatile.

The Fed's troubles are about to come.

For the Fed, troubles lie ahead. While Goldman Sachs believes that with the easing of car and housing rental categories and a softening labor market, "inflation will further slow down in the next year," the company is also concerned that tariffs planned by President-elect Trump may keep inflation high in 2025.

Trump's election further complicates the inflation outlook, with some economists believing that if Trump fulfills his major campaign promises, the US could face a resurgence of inflation.

Economists believe that Trump's proposed policies, such as imposing high tariffs on imported goods, tax cuts for corporations, and limiting immigration, could lead to inflation. These policies may further complicate the Fed's future interest rate path.

Goldman Sachs expects core CPI inflation to soften, but only to 2.7% next year, while the Fed's inflation measure—the core PCE price index—is projected to decline from the latest 2.8% to 2.4%, still above the Fed's 2% target.

Given that inflation is expected to remain well above 2% and macroeconomic growth is still close to 3%, this is usually not an environment where the Fed is willing to cut rates. The market expects the Fed to skip the January meeting next year and possibly cut rates again in March.

As of Tuesday, the market continues to expect the Fed to cut rates by another 25 basis points in December, with the likelihood of a rate cut increasing from about 73% a week ago to 86%.

Bank of America stated in its report, "The labor market has rebalanced, supply constraints have largely eased, and inflation expectations remain stable. That is to say, given that we expect changes in tariff, fiscal, and immigration policies, inflation progress should stall next year."

The Goldman Sachs economic team led by Jan Hatzius agreed in a report released on Monday, stating that due to the rebalancing of car, housing rental, and labor markets, inflation should further slow down next year, but this will be offset by "upgraded tariff policies."

As the Wells Fargo economic team stated, the last step is always the hardest, "the anti-inflation momentum is weakening, and new headwinds (such as the possibility of tariffs and tax cuts) have emerged, making the journey for inflation to finally return to the Fed's 2% target increasingly difficult."

Allianz's North also stated:

"When the market is as certain as it is today, the Fed does not want to create too much surprise. So, unless we experience an unexpected surge in inflation, I am very confident that the Fed has locked in its target. For me, the Fed's 2% target means inflation needs to consistently hit 2% in the foreseeable future, and if there are no signs of that in these reports. In that environment, you really do not want to cut rates."

Has the gold price seemingly broken out of consolidation, providing a good entry point for bulls?

On Wednesday, gold reached a nearly two-week high. Earlier, Goldman Sachs reaffirmed its bullish stance on gold prices and countered some pessimistic views in the market that gold prices cannot rise to $3000 per ounce by the end of 2025 amid a strong dollar.

Kyle Rodda, a financial market analyst at Capital.com, believes, "The CPI data expected by the market essentially opens the green light for a Fed rate cut next week, which may be the catalyst we need for gold."

On the technical front, FXStreet analysts point out that the daily chart shows gold closed above the 50-day SMA ($2670) on Tuesday, breaking out of a consolidation pattern that lasted for 10 trading days. The 14-day RSI is trending upwards above the neutral level, indicating that the short-term upward momentum for gold has not yet reached its limit. If the US November CPI announced tonight is weaker than market expectations, it could likely drive gold prices further up to the November 25 high of $2725. If the upward momentum can expand, the bullish target will be set at $2750. A breakout at this level would be a good entry point for gold bulls, as prices could further test the resistance of the historical high of $2790.

If CPI data rebounds unexpectedly, gold may face new headwinds, with the bearish target likely being the support level of the 50-day SMA ($2670). If gold returns to the recent range of fluctuations, attention should be paid to the 21-day SMA ($2638) and last week's low of $2613.

Article shared from: Jin Shi Data