Inflation in the US is known: what the market expects and how the Fed cuts continue

A key economic report for the market is expected this Wednesday. The US inflation data is known, which is expected to show that progress in reducing price dynamics has stalled, although not enough for the Federal Reserve not to reduce interest rates next week.

The Consumer Price Index, a broad measure of the costs of goods and services in the U.S. economy, is likely to reflect an inflation rate of 2.7% year-over-year for November, a slight increase of 0.1 percentage point from the previous month , according to the Dow Jones consensus.

Excluding food and energy, core inflation is estimated at 3.3%, unchanged from October. Both measures are projected with monthly increases of 0.3%.

What Wall Street expects

Wall Street economists expect headline inflation to rise 2.7% year-over-year in November, up from 2.6% in October.

In terms of “core” inflation, which excludes food and energy prices, the CPI is expected to have increased 3.3% year-on-year, marking the fourth consecutive month with a reading of 3.3%.

Looking ahead to mid-2022, when the CPI reached a peak of 9%, “significant progress” is evident, as Fed Chairman Jerome Powell has recalled. However, looking at the past few months, the Fed appears to be facing a problem familiar to many.

While some compare the final drop in inflation to the challenges of the “last mile” in a race, Nela Richardson, chief economist at ADP, explained to Yahoo Finance that the Fed’s current dilemma is more like a weight loss process. .

“The labor market is slowing. Wage growth appears to have stalled, and the Fed is still trying to reduce inflation,” Richardson said. “I liken it to trying to lose the last five kilos; that’s usually the hardest part, and getting inflation down from 2.5% to 2% will probably be the hardest part.”

Just as trying to hit an exact number on the scale can entail costs, achieving the inflation target also has its risks. In the case of weight loss, extreme measures such as eliminating carbohydrates or prolonged fasting can harm long-term health. For the Fed, keeping rates “higher for longer” could have similar effects on the economy.

For example, Richardson points to wage growth, which “probably needs to slow to be consistent with 2% inflation.” However, he added that the timing is crucial, as ADP data shows that wage increases are barely matching the CPI.

If an aggressive stance by the Fed to keep rates high were to quickly reduce wage increases and weaken other areas of the labor market, things could quickly unravel. If consumers can’t keep the pace between wages and prices, Richardson explained, “it will be difficult for them to continue spending at the current level, which is what really supports the economy.”

This leads Richardson (and other economists) to prefer a gradual approach to cutting rates next year. It’s like the advice of a personal trainer: following a proper and sustainable diet is more effective than taking extreme measures that could harm long-term health.

Wednesday’s CPI report: stagnation in progress against inflation

A key economic report on Wednesday is expected to show that progress in reducing inflation has stalled, although not enough for the Federal Reserve not to cut interest rates next week.

The Consumer Price Index, a broad measure of the costs of goods and services in the U.S. economy, is likely to reflect an inflation rate of 2.7% year-over-year for November, a slight increase of 0.1 percentage point from the previous month , according to the Dow Jones consensus.

Excluding food and energy, core inflation is estimated at 3.3%, unchanged from October. Both measures are projected with monthly increases of 0.3%.