With the Consumer Price Index (CPI) and Producer Price Index (PPI) reports, Wall Street economists predict that the Federal Reserve's preferred inflation gauge—the Personal Consumption Expenditures Index (PCE)—will see a slight increase in November, justifying a rate cut.

The PCE report to be released next Friday may show that the so-called core PCE, excluding food and energy, rose 0.2% month-over-month. Some analysts even believe that a slight increase of 0.1% is also possible.

After consecutive increases of 0.3% in core PCE in October and September, such readings would relieve the Federal Reserve.

The Federal Reserve views the PCE as the best measure of inflation in the U.S., with core PCE being the most closely watched, as food and energy prices may fluctuate in the short term, making it more difficult to discern the long-term trend of inflation.

The PCE report will be released after the Federal Reserve's last policy meeting of the year next week, but officials now have enough evidence to make a judgment.

Meanwhile, overall PCE may rise by 0.2% to 0.3% month-over-month. If Wall Street is correct, the year-over-year growth rate of overall PCE will increase from 2.3% to 2.6%, moving it further from the Federal Reserve's 2% target. The year-over-year growth rate of core PCE will either remain at 2.8% or rise slightly.

So, why is the Federal Reserve still considering rate cuts?

Most Federal Reserve officials believe that inflation will begin to decrease again by next spring, and they view the interest rates as too 'restrictive'.

In the Fed's jargon, this means that interest rates are still high enough to suppress economic growth and even increase unemployment.

The Federal Reserve hopes to move towards a so-called neutral interest rate, which is neither high enough to suppress growth nor low enough to stimulate the economy.

However, after a rate cut in December, Wall Street generally expects the Federal Reserve to pause further rate cuts until clear evidence of a decrease in inflation is received.

They will hope to act cautiously in 2025 in case inflationary pressures rebound, said Bill Adams, chief economist at Comerica.

This article is reposted from: Jinshi Data