On December 11, Wednesday, the U.S. November Consumer Price Index (CPI) inflation fully met expectations, reinforcing traders' expectations that the Federal Reserve will cut rates by 25 basis points next week, and also slightly increasing bets on continued rate cuts in January.
Data shows that the U.S. nominal CPI rose 0.3% month-on-month and 2.7% year-on-year in November, both up 0.1 percentage points from October's values, marking the first acceleration in year-on-year growth of nominal CPI for two consecutive months since March; the core CPI, excluding volatile food and energy prices, also increased 0.3% month-on-month, marking the fourth consecutive month of 0.3% growth, with a year-on-year increase of 3.3%, unchanged from the previous value.
However, analysts generally note that this expected CPI data also shows that the cooling of inflation has basically stalled in recent months. The core CPI has maintained a high year-on-year growth of 3.3% for three consecutive months, far above the level consistent with the Federal Reserve's more important inflation indicator, the Personal Consumption Expenditures Price Index (PCE), returning to the 2% target.
According to the FedWatch tool tracked by the Chicago Mercantile Exchange (CME), after the CPI release, the futures market sees a nearly 95% probability that the Federal Reserve will cut rates by 25 basis points next week, up from 89% the day before. U.S. Treasury yields briefly fell from the day's high to the day's low, further reinforcing expectations for a rate cut. However, bets on continued rate cuts in January only rose slightly from 19% to 22%.
The inflation data does not change the Federal Reserve's path of 'gradual easing in the new year,' nor is it enough to derail the year-end bull market in U.S. stocks.
Vital Knowledge analyst Adam Crisafulli frankly stated that this end-of-year data is the most important economic data, making next week's rate cut a foregone conclusion. However, the outlook afterward is less clear. He expects a ‘mildly hawkish shift’ in the forward guidance of the Federal Reserve's meeting statement, which may at least keep the January 2025 meeting on hold, and March may also pause rate cuts.
Whitney Watson, co-head of global fixed income at Goldman Sachs Asset Management, also believes that the core CPI inflation rate meets expectations, paving the way for the Federal Reserve's rate cut next week. The data did not heat up to a level that would shock the market, which would keep Federal Reserve officials confident in the process of cooling inflation as they cross over into the new year, continuing to gradually loosen monetary policy.
LPL Financial analyst Jeffrey Roach stated that wage growth still outpaces inflation, putting American consumers in a favorable position as they enter the new year. As the more challenging parts of inflation stabilize, the Federal Reserve may continue to cut rates slowly and orderly.
TradeStation market strategist David Russell and U.S. Bank Asset Management senior investment strategist Tom Hainlin both expect that while inflation has stopped declining, it is not enough to derail the bull market in U.S. stocks. The former particularly points out, 'The catalytic effect of inflation and the Federal Reserve on the market is weakening, and attention may now turn to the tariff policy of the new administration.'
Analysts say that strong core CPI will make a minority of the Federal Reserve concerned about inflation stagnation, making next week's rate cut not a certainty.
A closer look at the CPI data reveals that the closely watched 'Owner's Equivalent Rent' metric rose 0.23% month-on-month in November, the smallest increase since early 2021, but overall housing costs remain the most stubborn part of rising inflation, accounting for nearly 40% of the CPI increase, with the housing expenditure index rising 4.7% year-on-year in November.
At the same time, food, used cars, and healthcare are also major factors driving the acceleration of CPI increases in November. Prices of used and new cars have reversed the recent trend of monthly declines. According to the U.S. Bureau of Labor Statistics, 'almost no major price components have declined.'
In recent days, many Federal Reserve officials have expressed disappointment over the 'stubborn inflation,' suggesting that if more progress is not made in cooling inflation, the pace of interest rate cuts entering 2025 may need to slow down. If the Federal Reserve cuts rates by 25 basis points next week as 'expected,' the federal funds rate will have been lowered by a full percentage point (100 basis points) since September of this year.
Nick Timiraos, a well-known financial journalist known as the 'new Federal Reserve messenger,' stated that in the past 18 months, the decline in core commodity prices has largely driven the cooling of inflation, 'now this situation has ended.' For example, the rise in car prices in November drove core commodity prices to grow by 0.3% month-on-month, far exceeding the 0.05% month-on-month increase in October and 0.17% month-on-month growth in September.
Anna Wong, head of Bloomberg Economics, pointed out that the strong core CPI inflation in November will raise concerns among the minority of the FOMC, who worry that the cooling of inflation has stalled, making next week's rate cut not a certainty:
"Indeed, while housing rental inflation has finally eased, commodity prices have lost their deflationary momentum. The current monthly inflation rate aligns with an annual inflation rate exceeding 3%, rather than with the Federal Reserve's 2% target."
Bloomberg interest rate strategist Ira Jersey stated that inflation is now closely related to the service sector. Although potential new tariff policies may raise commodity inflation for a while, at least the driving factors of current inflation have not changed:
"As the service sector's inflation rate continues to grow at an annual rate of 4.5%, core inflation is unlikely to reach the Federal Reserve's target in the short term."
The 10-year U.S. Treasury yield rebounded in a V-shape, returning to the day's high in late trading, rising about 6 basis points intraday, reaching a two-week high. The two-year Treasury yield, sensitive to interest rates, also slightly turned up, having previously dropped nearly 5 basis points at the lowest point after the CPI data was released.
The consensus expectation on Wall Street is that the Federal Reserve will pause interest rate cuts in January next year, with attention drawn to the potential upward inflation risks from tariffs.
Brian Coulton, chief economist at Fitch Ratings, also stated that the decline in core commodity prices is an important component of the overall cooling of inflation this year, and this trend seems to have ended.
"With rising car prices, core commodity prices increased by 0.3% month-on-month in November. Although service sector inflation is declining, the pace is very slow, as rent inflation remains stubborn at 4.6%, still far above pre-pandemic inflation levels."
Currently, the mainstream expectation on Wall Street is that the Federal Reserve will pause interest rate cuts in January next year:
CIBC Capital Markets analyst Ali Jaffery believes that there are still doubts about the extent of rate cuts in 2025. If economic growth does not slow or overall price pressures do not further ease, the threat of pausing rate cuts and extending the easing cycle is intensifying.
Richard Flynn from Charles Schwab in the UK pointed out that several Federal Reserve officials expressed dissatisfaction with the pace of cooling inflation, and the November CPI data failed to reassure people about this. This could lead the Federal Reserve to act cautiously, pausing rate cuts to avoid increasing price pressures.
Pepperstone analyst Michael Brown stated that the risks of monetary policy in the first quarter of next year will become increasingly two-sided, with Federal Reserve officials primarily concerned about the potential upward inflation risks from Trump's tariff plans and the broader 'reflationary' fiscal policy stance, as strong demand may further exacerbate price pressures.