The Consumer Price Index report, scheduled for release Wednesday, December 11, is likely to show that the rate of decline of inflation has slowed. Consensus forecasts suggest that it will be 2.7% in November, up 0.1 percentage point from October, while core inflation, which is adjusted for volatile food and energy prices, will remain unchanged at 3.3%. Headline and core CPI are expected to increase by 0.3% monthly.
The inflation data comes at a sensitive juncture because the Federal Reserve is on an elongated journey to tame surging prices. Although inflation has tamed itself sharply since the June 2022 peak at 9%, the cost of living continues to be one major pain point for consumers, particularly low-income ones. According to economists, while some items – autos and housing – seem to have eased off their rising trend, the overall scenario remains above the 2% target of the Fed.
Despite the continuing inflation, the futures markets predict the Fed is going to reduce the interest rate by 0.25 percentage points in its December 18 meeting. It can be predicted that the Fed is going to continue rate cutting well into 2025 even when inflation remains miles ahead of its target.
The CPI for November is also expected to be influenced by surging costs in key sectors like car prices, airfares, and auto insurance. Goldman Sachs analysts predict that car prices may go up by 2% in November, while airfare prices are likely to rise by 1%. Auto insurance costs are also expected to continue their upward climb after having surged 14% over the past year.
Going forward, economists anticipate that inflation will gradually ease in 2025, especially as the effects of softening labor markets and easing auto and housing prices start to be felt. However, there are some uncertainties that exist, particularly regarding potential tariffs under the incoming administration. These could keep inflation elevated in the short term, making the Fed’s job more difficult in terms of trying to balance control of inflation with economic growth.
To summarize, though the momentum on inflation is slowing down, the U.S. economy is expected to experience upward pressure on prices during the months ahead. The Fed will, most likely, tread cautiously in the next steps that it would take to curb inflation while also keeping the economy moving.
