Briefing at a Glance

  • Last month's inflation rose slightly, highlighting the challenges the Federal Reserve faces in completing its nearly three-year process of slowing price increases to its 2% target.
  • Data released by the U.S. Bureau of Labor Statistics on Wednesday showed that the Consumer Price Index (CPI) rose 2.7% year-over-year in November, up from 2.6% in the previous month. Housing costs rose 0.3% month-over-month, contributing nearly 40% of the CPI increase. Excluding volatile food and energy prices, core CPI rose 3.3% year-over-year.
  • "We still expect the Fed to cut rates by 25 basis points next week," BofA Securities analysts said in a report on Wednesday, referring to the central bank's December 17-18 policy meeting. "The recent strength in inflation does make a January rate cut less likely."

In-Depth Analysis

The persistent inflation report released on Wednesday did not shake the confidence of interest rate futures traders. According to the CME FedWatch tool, they see a 95% probability that policymakers will cut the benchmark rate by 25 basis points next week, up from 89% the previous day.

"The slight rise in inflation may not represent a change in trend," said Scott Helfstein, head of investment strategy at Global X, in an email. He expects the central bank to cut the federal funds rate by 25 basis points next week with high likelihood.

Helfstein believes the Fed could cut its benchmark rate three to four times in 2025, but he also pointed out risks to his forecast.

"Prices could be more volatile next year, with tariff increases affecting consumer prices and tax cuts stimulating demand," Helfstein said. "But for now, price stability has returned."

According to the Bureau of Labor Statistics, prices for used cars and trucks rose 2% month-over-month in November, compared with a 2.7% increase in October.

Housing costs, while slowing by 0.1 percentage point month-over-month compared with October, still rose 4.7% year-over-year. Fed officials have noted that housing prices are relatively "sticky," rising and falling more gradually than other prices.

"November rent data were more moderate than pre-pandemic levels," BofA Securities analysts said. "This situation may not persist in the short or medium term, but rents appear to have finally started to ease."

The Bureau of Labor Statistics said prices for household goods, healthcare, and recreation all rose in November, while the communications index was one of the few declining components.

Inflation has gradually moved toward the Fed's 2% target, and despite interest rates at two-decade highs, the unemployment rate remains relatively low at 4.2%.

Given easing price pressures, the central bank cut its benchmark rate by 25 basis points last month and by 50 basis points in mid-September.