On Tuesday, investors will digest one of the most important data points the Federal Reserve will consider in its next interest rate decision: November’s Consumer Price Index (CPI).
The inflation report, set for release at 8:30 a.m. ET, is expected to show headline inflation of 3.1%, a slight deceleration from October’s 3.2% annual gain in prices, according to estimates from Bloomberg. Over the prior month, consumer prices are expected to remain flat for the second straight month.
Lower energy costs are likely to have held the headline figures to a smaller gain in annual prices, according to Bank of America.
The bank anticipates a 3.5% month-over-month drop in energy prices after dropping 2.5% in October. The dip will be driven by lower gas prices, which fell sharply during the month of November.
On a “core” basis, which strips out the more volatile costs of food and gas, prices in November are expected to have risen 4.0% over last year — matching the annual increase seen in October, according to Bloomberg data. Monthly core prices are expected to have climbed 0.3%, slightly higher than October’s 0.2% monthly rise.
Bank of America US economist Michael Gapen said higher prices for “volatile” categories like lodging away from home and used cars should lead to a “firmer core” after both of those categories saw prices decline in October.
“We expect used car prices to increase because wholesale prices temporarily rose in both August and September amid concerns over the UAW strike. Meanwhile, we are looking for an increase in lodging away from home largely due to expectations for reversion to the mean after a large drop in October,” Gapen wrote in a note on Monday ahead of the report.
Still, “aside from these swing factors, we expect the data to be relatively supportive of disinflation,” the analyst said.
To hike or not to hike?
Although inflation has remained significantly above the Federal Reserve’s 2% target, investors are largely betting the Federal Reserve won’t raise rates in December — especially after recent dovish rhetoric from Federal Reserve officials.
Fed governor Christopher Waller said late last month he’s “increasingly confident” interest rates are at the right level to fend off inflation.
As of Monday afternoon, markets were pricing in a nearly 100% chance the Federal Reserve keeps rates unchanged in December, according to data from the CME Group.
The market expects the central bank to begin cutting rates at its March meeting, pricing in a roughly 40% chance of a rate cut.
Bank of America, however, does not expect the first Fed rate cut to come until June.
“In recent days, the market has priced in a high likelihood of the first cut being in March, particularly after comments from Governor Waller that were perceived to be dovish,” Gapen wrote.
“We think that this is likely too early given our labor market and inflation outlook. Of course, if data (labor, activity, and inflation) come in materially weaker than we expect, then a cut as soon as March is a possibility.”
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