Consumer prices likely stayed flat for the second straight month as falling gasoline prices balanced out increases in used car and hotel room costs. That should be enough to keep the Federal Reserve on hold this week—but officials will likely want to see further progress before they promise interest rate cuts early next year.
Economists forecast the consumer price index climbed at a 3.1% annual pace in November, consensus expectations from FactSet show, marking a tick down from the 3.2% recorded in October. On a month-over-month basis, economists forecast headline inflation held steady, matching the 0.0% change seen in October as well.
The Labor Department will release the CPI data at 8:30 a.m. Tuesday.
Core CPI, which excludes the volatile food and energy indexes and is considered a better gauge of underlying price growth, likely climbed. Economists forecast core prices rose 0.3% in November, accelerating slightly from October 0.2% increase, and reaching a 4% annual pace, matching the pace set the month before.
The inflation print will gain outsize attention this month because it will be the final major data set released before the Federal Reserve’s December policy meeting, which is set to begin Tuesday morning and run through Wednesday afternoon. A report that comes in line with expectations should do little to push the central bank to raise interest rates from the current range of 5.25 to 5.5%, especially because officials have been telegraphing in recent weeks that they are likely to hold rates steady this month.
As of Monday afternoon, investors were pricing in a more than 98% chance of no rate increase on Wednesday.
“November CPI should not change the narrative,”
Bank of America
economist Michael Gapen wrote in a client note on Monday.
Still, the November inflation data could affect expectations for how soon the Fed will be looking to cut interest rates next year. And in that regard, Tuesday’s report could dampen expectations over how quickly the central bank will be looking to move rates out of restrictive territory.
For one, the primary reason economists expect headline price growth to have held steady in November is due to falling gasoline prices. While that is welcome news for consumers, it says little about where underlying inflation is heading—and the central bank cares far more about broad-based inflationary pressures than it does about changes in gasoline costs.
Used car and hotel room prices are expected to lead core inflation higher in November after both notched sizable slowdowns the month before. Rent costs and an equivalent measure for homeowners are expected to remain hot in November, rising an estimated 0.4% for the month.
And a narrow category of so-called “supercore” services, or core services excluding rent, on which the Fed has been especially focused is expected to double its monthly rise to climb 0.4% in November, the Bank of America team estimates. Supercore services increased 0.2% in October.
The inflation print will also be coming close on the heels of the strong November jobs report, released on Friday, which showed 199,000 jobs added and the unemployment ticking down to 3.7%. That, in combination with a strong core CPI print, could be enough to prompt the Fed to throw cold water on the growing expectation among investors that the central bank will begin cutting rates as early as March of next year.
“We think that market enthusiasm for rate cuts has become overblown,” Mark Dowding, BlueBay chief investment officer at RBC Global Asset Management, wrote Friday. “Financial conditions have eased materially and unless we see notably softer data in payrolls and [inflation], we think that the upcoming Fed meeting won’t see much of a revision in tone.”
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