US CPI Drives Policy Rate Cut Expectations Higher

The Gist

The Consumer Price Index (CPI) for November 2024 rose by 0.3% month-over-month and 2.7% for the twelve months ended in November. Core CPI, which excludes volatile food and energy prices, increased by 0.2% MoM and 3.3% for the same 12-month period. The report solidified market expectations for a cut to the Federal Reserve's policy rate at the next FOMC meeting.

The Color

November's inflation data highlights challenges and progress, with housing and services continuing to drive price increases. Shelter costs rose by 0.4% MoM and were a major contributor to the headline figure; however, the 4.7% YoY increase is the smallest since February 2022. Food prices nudged up by 0.2%, reflecting steady pressures on household essentials, while energy prices dipped 0.5%, mainly due to a drop in gasoline costs. While energy declines helped ease overall inflation, core inflation remains stubbornly elevated.

The Takeaways

For market participants, the November CPI report provided certainty of a Fed policy rate cut to 4.25% - 4.50%  this upcoming meeting on December 18th. The labor market remaining strong with the 4.2% unemployment rate and inflation meeting expectations seem to confirm that the policy rate level at 4.50% - 4.75% remains restrictive, at least, according to recent speeches by FOMC members. Expectations for a rate decline went from 89% on Tuesday (before the announcement) to 98% on Wednesday (after the announcement). The probability currently stands at 96%, according to the CME FedWatch Tool.

You can read the full report here.