Although the stock market fell slightly on Thursday, investors largely ignored the recent inflation report. However, Bank of America believes that as inflation worsens, they may face a reckoning in the new year.

The bank's economist Stephen Juneau wrote in a report to clients on Thursday, "Upcoming potential policy changes—higher tariffs, deficit-funded tax cuts, and tighter immigration policies—could all put upward pressure on prices. In fact, due to these policy changes, we predict that core PCE inflation will hardly decline over the next two years."

Recent data from the last two inflation reports indicates that progress in reducing inflation has stalled.

According to the U.S. Bureau of Labor Statistics, the consumer price index (CPI) rose 0.3% month-over-month in November, with the year-over-year growth rate increasing by 0.1 percentage points to 2.7%. The CPI in October was already on an upward trend, rising 0.2% month-over-month, with a year-over-year growth rate of 2.6%, up 0.2 percentage points from September. Similarly, the producer price index (PPI) published on Thursday rose 0.4% month-over-month in November, exceeding the market's general estimate of 0.2%.

After the November CPI data met expectations, the implied probability of the Fed cutting rates by 25 basis points at next week's meeting rose to about 98% according to the 30-day federal funds futures prices. However, the outlook for future rate cuts remains "cloudy," Juneau wrote.

"At next week's meeting, the Fed will also have to acknowledge the lack of progress on inflation," he explained. "We think the Fed may pause rate cuts in January next year, with the risk that policy changes during (Trump's second term) might make this pause prolonged."

BlackRock's Global Fixed Income Chief Investment Officer Rick Rieder wrote in a report on Wednesday: "The Federal Reserve is generally satisfied with the progress made in lowering high inflation levels over the past few years... but most of that progress is now behind us, and inflation may stubbornly remain near current levels for some time."

Oren Klachkin, a financial market economist at Nationwide, stated on Thursday that a series of inflation indicators "are on a long and bumpy journey to reach the Federal Reserve's targets," adding that this week's inflation data "should not affect the Fed's rate cut next week, and we expect the Fed to cut rates again (by 25 basis points). However, evidence of a slowing anti-inflation process suggests that a pause in rate cuts could be possible in early 2025."

EY's chief economist Greg Daco noted that the market is "very confident that the Fed will continue" to cut rates by 25 basis points at the December policy meeting, although "I think the likelihood is closer to a coin toss," as inflation remains so sticky.

Daco does expect the Fed to cut rates next week but anticipates that this will come with a signal that the next two rate cuts in 2025 will be "spaced further apart." He added that as policymakers adapt to the new Trump administration's policies (which some expect will exert upward pressure on inflation), investors should expect the Fed to pause after its last rate cut this year.

"I think the Fed will want to remain cautious," Daco said.

Article reposted from: Jin Shi Data