What To Look For In November’s CPI Inflation Release

Consumer Price Index data for November 2023 will be released on Tuesday, December 12 at 8.30am E.T. Markets expect inflation will cool, with headline inflation moving lower as energy prices ease. This expectation, in part, underpins the market’s believe that the Fed will probably cut rates by the spring.

CPI Nowcasts

Headline CPI inflation is expected to be basically flat month-on-month and 3% on annual basis according to nowcasts from the Cleveland Fed. That’s in part due to falling energy prices. Nowcasts use currently observable market prices, such as for energy commodities, to estimate upcoming inflation figures.

However, core CPI stripping out food and energy, is predicted to be less encouraging, growing 0.3% month-on-month and 4% annually. That’s materially above the Fed’s 2% annual inflation target.

Event forecasting site Kalshi presents a similar view, currently estimating that headline CPI inflation is most likely to fall in a 0%-0.1% range month-on-month for November 2023.

What To Watch For

Within the numbers the Fed will be, once again, watching services inflation. As the labor market remains generally robust, the concern for Fed is that services prices may continue to rise materially. That’s because wages are a large component of delivering most services.

Then there’s an expectation that a wave of deflation in goods is returning. That’s something we’re seeing in car prices as of October’s CPI numbers and commodity pricing, in addition to energy prices, are generally moving lower too, which may support that trend.

Lastly, shelter costs are a major component of the CPI index and the Fed expects price growth to moderate or ultimately even decline here. That’s as mortgage costs have increased sharply in recent years limiting housing affordability. For October, shelter costs rose 0.3% month-on-month signaling deceleration in 2023, though home prices are still increasing at a sufficiently high rate to contribute meaningfully to inflation.

The Fed’s Reaction

The Fed won’t have much time to digest the CPI report with its December interest rate decision coming the following day. For now, the market is more optimistic on the inflation fight being won, than the Fed. The Fed wants to see more evidence that inflation is returning to its 2% annual goal.

Specifically, the Fed worries that inflation may get stuck at a level above 2% and that further progress on disinflation could be slow. Also, unlike the financial markets which are inherently predictive, the Fed can generally wait for the economic data to come in before making its decision.

The Fed’s concern is that a relatively robust jobs market and strong economic growth may continue to create inflationary pressure. November’s CPI numbers are unlikely to be decisive in shaping that debate but do represent a relevant datapoint. Still, further cooling of inflation would be encouraging. For now, the Fed hints that interest rate increases could occur in certain scenarios, but the market believes that another hike is extremely unlikely and interest rate cuts are coming.

November’s CPI inflation report is expected to bring more evidence of cooling inflation, but the question is whether it will be enough for the Fed to adjust its tone and start raising the prospect of interest cuts. Currently, it appears that the Fed may want more supportive data before making that shift.

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2023-12-10 18:53:17

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