Preview: What to expect from Wednesday’s US CPI report

Is the Federal Reserve stalling in its battle against inflation?

That’s the question the market will be mulling on Wednesday at 8:30 am ET as November inflation numbers are released in the CPI report.

The headline inflation number is expected to tick up to 2.7% from 2.6% in what would be the second rise from a 2.5% reading in September. The Fed saw some of this coming as base effects from last autumn roll off but it’s still concerning that inflation is moving in the wrong direction.

At times, the market would take the Fed for its word that inflation is trending lower and will fall to 2% in 2025. Moreover, there are times when the market would easily tolerate inflation modestly above 2%.

This isn’t one of those times. The memory of 9% inflation is fresh and it upended politicians and policymakers all over the world. There is a fear that companies are now more-likely to probe for pricing power and workers are more likely to push for higher wages. That has many believing that inflation needs to be completely snuffed out. In addition, the stock market has been raging hot this year and that has many expecting strong growth in 2025.

The Fed has clearly communicated a desire to continue gradual rate cuts down to a rate of around 3.50% from the current 4.50-4.75% but how quickly they get there is debatable and will be a lively debate at the upcoming FOMC. Governor Waller said he was ‘leaning’ towards cutting again in December but it would depend on a handful of indicators, including Wednesday’s CPI.

Current pricing is 85% toward a cut so it would have to take a surprise of more than 0.1 percentage points to truly shift the narrative.

More than headline — which can be bounced around by energy prices — the focus is likely to be on core inflation. That’s forecast to remain steady at 3.3% y/y. Estimates are tightly packed at 3.2-3.4% with no outliers so the scope for a big surprise is low.

The market will be looking at the unrounded numbers as well:

• Prior headline unrounded +0.2441% m/m
• Prior core unrounded +0.2800% m/m

In addition, the Fed looks closely at core-CPI services ex-rent/OER which was at a benign +0.2% in October.

Overall, the bigger picture on inflation is what matters for markets and I’m convinced that we’re still in a disinflationary world and likely headed to a deflationary world with AI and robotics. That doesn’t matter for the 2025 trade but I find it compelling that all the inflation is in services. I can’t put it any better than this:

This article was written by Adam Button at www.forexlive.com.