Inflation at 2.7% Annual Rate, Core CPI 3.3%—Fed Weighs Future Rate Cuts Carefully

Inflation Accelerates to 2.7% in November, Aligning with Forecasts

The U.S. annual inflation rate rose to 2.7% in November, reflecting a modest acceleration that aligns with expectations but highlights ongoing inflationary pressures. The Consumer Price Index (CPI) report from the Bureau of Labor Statistics revealed a 0.3% monthly increase in overall prices, with core CPI, which excludes volatile food and energy prices, also advancing 0.3% monthly and 3.3% annually. These figures matched Dow Jones consensus estimates.

What Are the Key Drivers of Inflation?

The shelter index contributed significantly, accounting for nearly 40% of the monthly CPI increase. Shelter costs climbed 0.3%, and core indexes like used cars and trucks (+2.0%) and household furnishings (+0.6%) also supported inflationary trends. Food prices rose 0.4% monthly, led by a 1.7% surge in meats, poultry, fish, and eggs, with eggs alone spiking 8.2%. Meanwhile, energy prices edged up 0.2%, driven by a 0.6% increase in gasoline costs, although energy prices remain 3.2% lower than a year ago.

Notable price declines included the communication index (-1.0%), indicating deflation in select sectors. Overall, November marked the first time in five months that inflation accelerated, signaling persistent pricing challenges.

What Does This Mean for Federal Reserve Policy?

The Federal Reserve’s decision-making is under scrutiny as inflation remains above its 2% target. Markets largely expect the central bank to reduce its benchmark interest rate by 0.25% at the December 18 meeting. However, some Fed officials have expressed concerns about the resilience of inflation and suggested a cautious approach to future rate cuts. Should the Fed proceed, it will have trimmed rates by a full percentage point since September.

Despite rate cuts, inflation’s stickiness in categories like shelter (+4.7% annually) and motor vehicle insurance (+12.7% annually) could limit the central bank’s flexibility in easing monetary policy further in early 2025.

What Lies Ahead for Markets?

The inflation report underscores the likelihood of a mixed market outlook. The anticipated rate cut may offer relief for equity and bond markets, but persistent inflation in core categories could temper optimism. With shelter and food prices still rising, consumer spending power may face constraints. Energy prices, which have moderated on an annual basis, could provide some respite if current stabilization trends continue.

Market Forecast: Inflation’s trajectory suggests a cautiously bearish short-term outlook for bonds and a mixed-to-bullish scenario for equities, contingent on the Federal Reserve’s actions next week. Traders should monitor Fed commentary closely for signals of policy shifts into 2025.