Daily Management Review

Consumer Inflation Is Anticipated To Continue To Fall In November, But Will Still Remain High


Although consumer inflation likely slowed in November, prices continued to rise at a rapid pace, particularly for services.
According to Dow Jones, economists expect the consumer price index to rise 0.3% in November, or 7.3% on an annual basis. This is a decrease from 7.7% in October. According to Dow Jones, excluding food and energy, core CPI was expected to rise by 0.3%, or 6.1% year on year, compared to October's 0.3% gain, or an annual rate of 6.3%.
The Federal Reserve's two-day meeting begins at 8:30 a.m. ET Tuesday, and the inflation report is expected.
The Federal Reserve of the United States is widely expected to raise interest rates by half a percentage point Wednesday afternoon, and economists generally expect the Fed to stick with the 50 basis point increase even if the CPI report is hotter. A basis point is equal to 0.01 percentage point.
“I think if the market sees something in line, all is good,” said Mark Cabana, head of U.S. rate strategy at Bank of America Merrill Lynch. “If the theme holds, rates [bond yields] probably still decline a bit. But if we see something that surprises to the upside, I think that would generate a more sizeable market response because it would be questioning the theme the market has really latched on to — which is that inflation has peaked.”
Economists believe the Fed will continue to raise interest rates until the fed funds target rate reaches 5% or slightly higher. The fed funds rate is currently set at 3.75% to 4%. A hotter or lower CPI report is unlikely to sway the Fed for this meeting, but economists say it could be a signal about interest rates' longer-term trajectory.
Stocks were higher on Monday, and Treasury yields were higher as well, ahead of the CPI report on Tuesday. Bond yields move in the opposite direction of bond prices. The 2-year note yield, which most closely reflects Fed policy, increased 0.06 percentage point to 4.39% on Monday.
Fed Chairman Jerome Powell holds his regular post-meeting press conference at 2:30 p.m. ET on Wednesday, a half-hour after the Fed releases its policy statement and the most recent economic and interest rate forecasts.
“I think it will be another benign print. I’m pretty neutral on this report,” said Aneta Markowska, chief financial economist at Jefferies. “It feels like that risks are asymmetrically skewed toward the high side. I think if you get a higher print, I think the [stock] sell-off is disproportionately stronger.”
Markets will be primarily focused on inflation from services, excluding real estate, as Powell recently stated.
“Powell pretty much told us last week that we know core goods will continue to slow. We know housing will eventually slow as the decline in market rents eventually comes through. The one piece we don’t have confidence in slowing is core services ex-housing,” said Markowska.
According to the Jefferies economist, this component of the inflation report is critical because it includes areas that are driven by wage inflation, such as transportation, medical services, education, and recreation. She expects core goods inflation to slow and some price inflation in services to slow. Hotel rates are one area where inflation may slow, and economists anticipate that pandemic-related price increases will continue to fade, including in used automobiles.
“We know it’s going to be better inflation data. It’s going to be cooler. That’s great, but it’s going to be about getting down into a lot of details to see where there is inflation and where there isn’t,” said Diane Swonk, chief economist at KPMG. Swonk said the data is unlikely to be reflected in the Fed’s quarterly forecasts, expected Wednesday afternoon. But a hotter or weaker number could still influence other communications from the Fed.
“They will have already pulled it apart by the time they meet. They will be discussing it,” said Swonk. “It could shade the tenor, the nuance with which Powell delivers his press conference.”
Swonk believes the data will continue to be noisy and inconclusive about the direction of inflation.
“Unfortunately, it will be less definitive than we would like because we know there are some distortions in it,” she said. “The more important issue is whether there is something happening in that non-shelter service component that is more systemic than what the Fed is looking at.”
According to Swonk, it will be important to see if there is a significant downward movement or if inflation is plateauing, which would be positive in comparison to rising prices.
“We’re going to look at the things that are most dependent on wages,” she said. “It means looking at everything from restaurant costs, hospitality to hotel rooms, hair cuts and personal care.”
Energy, which has seen the most inflation, should continue to cool. In October, energy prices increased by 1.8%.