November Inflation Data Triggers Federal Reserve Rate Cut Speculation
The Bureau of Labor Statistics (BLS), reported a 2.7% annual inflation rate for November, slightly above October’s 2.6% figure but consistent with economists’ expectations. marginally above the October figure of 2.6%, this aligns with economists’ projections. Month-over-month, inflation rose by 0.3%, primarily driven by a persistent 0.3% increase in shelter costs, which accounted for nearly 40% of the monthly inflation figure.
Annual core inflation, excluding food and energy prices, remained stable at 3.3% and was up by 0.3% over the month. Food prices rose 0.4% from the previous month, whereas energy costs increased by 0.2%. Despite the improvements, energy prices continued to go down, with a 3.2% drop in price annually.
Federal Reserve Poised for Rate Cut
The inflation data confirmed the market sentiment that the Federal Reserve will lower its benchmark interest rate by 0.25 percentage points at the upcoming Federal Open Market Committee (FOMC) meeting on December 18. The CME Group’s FedWatch tool shows that traders currently regard the probability of the December rate cut at 99%. Nevertheless, the probability of a further decrease in January is still lower, at 23%.
Market analysts and policymakers believe that the Fed is still taking a modest inflation approach to policy. Whitney Watson, co-CIO for fixed income at Goldman Sachs Asset Management, emphasized the Fed’s confidence in the disinflation process. If the anticipated December cut occurs, the federal funds rate will decrease to a target range of 4.25-4.5%, marking a total reduction of 1 percentage point since September.
Impact on Markets and Consumer Wages
The inflation report had a positive impact on U.S. stock markets. The Nasdaq Composite gained 1.8%, closing above 20,000 points for the first time. The S&P 500 index was up by 0.8%, while the two-year Treasury yield, which indicates the direction of the Federal Reserve policy, remained at a constant 4.15%.
Still, the average hourly wage for employees was virtually unchanged in November when measured by an adjusted rate, as reported by the BLS. Thus, in percentage terms, real wages increased by 1.3% per annum.
Shelter costs continued to dominate the inflation, rising 4.7% annually in November. Inflation in the housing sector, which accounts for one-third of the CPI, continues to raise concerns for policymakers. However, there is optimism that new rental agreements could moderate pressures in the coming months.
