US inflation firms over recent months
The Fed should forecast fewer rate cuts given firmer inflation, resilient economic growth, and the inflationary impact of Trump policies.
The Fed meets next week on 17-18 December, reconvening next year on 28-29 January, shortly after Trump is inaugurated as president on 20 January.
The market is now almost completely convinced that the Fed will cut rates by 25bp next week after core CPI inflation came in line with market forecasts last night, even as price pressures have firmed over recent months.
CCI is less sure that a cut is the done deal indicated by market pricing, reflecting more open-minded Fed comments over recent weeks, including Fed Chair Powell saying last week that, “growth is definitely stronger than we thought, and inflation is coming a little higher [such that] the good news is that we can afford to be a little more cautious as we try to find neutral.”
Perhaps, though, it boils down to time-frames, as Powell could well have been referring to the outlook for rates next year, where the median September FOMC forecast of four 25bp rate cuts could be trimmed to 1-2 cuts given firmer inflation, the resilience of economic growth and the inflationary impact of Trump policies.
In terms of the core CPI:
- The core CPI matched market expectations, rising by 0.3% for the fourth month in a row, following gains of between 0.1-0.2% from May to July. Annual inflation was steady at 3.3% for the fourth month in a row. In trend terms, annualised monthly inflation has picked up from 2¼% around the middle of the year to almost 4%.
- After a long string of flat-to-down results, core goods prices have picked up recently, increasing by 0.2% in September, holding steady in October, and rising by 0.3% in November. Annual disinflation of 0.7% reflects earlier price declines. The trend estimate shows a large swing from annualised monthly disinflation of ¾% around the middle of 2024 to inflation of 2% now.
- The core services CPI rose by another 0.3% in November, having increased by between 0.3-0.4% for the past five months (excluding housing costs, services prices have been more volatile, increasing by 0.2% in November). Annual inflation resumed easing, edging down from 4.8% to 4.6% (or from 4.6% to 4.3% excluding housing costs). The trend estimate showed annualised monthly inflation picking up from 3½% in July to 4¼ in November (or from 2½% to 4¼% , ex-housing costs).
- The trimmed mean CPI echoed the core CPI, up 0.3% for the third month in a row, with annual inflation steady at 3.2% for fourth month in a row. In trend terms, annualised monthly trimmed inflation increasing from 2¼% in June to about 3½%.
Ahead of the release of the PPI and import prices later this week, the market expects the Fed’s preferred inflation measure, namely the core PCE deflator, to increase at a marginally slower rate of 0.2% in November.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy, contributing to the investment decisions of the firm. Kieran has long experience as a macroeconomist in both the private and public sectors. He has worked most recently as Chief Markets Economist for National Australia Bank and was previously Chief Economist, Australia and New Zealand, for Barclays Bank and ABN Amro Bank/RBS. Kieran also worked as Principal Adviser on the macroeconomy and budget policy in the Commonwealth Treasury and Director of Forecasting.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
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