United States
Headline and core consumer prices increased by 0.3% in November, pushing CPI up from 2.6% to 2.7%, but maintaining core CPI at 3.3%. Both figures were in line with market expectations. While this might initially seem like a setback on the journey to 2%, we believe the Fed will be heartened by the progress in the “sticky” core services components. Therefore, we still consider a rate cut next week to be a reasonable base case.
Core services prices continue to ease
Core goods prices rebounded somewhat, led by a pickup in used cars, new vehicles and household furnishings and supplies. Elsewhere, energy prices rose 0.2% in November, largely due to a 0.6% increase in gasoline prices.
Figure 1: Core goods prices display a modest rebound
Source: Macrobond, Bureau of Labor Statistics, Bloomberg, Insight, December 2024
However, the Fed is paying close attention to the “stickier” core services inflation components, which showed almost universal progress.
Rental components increased by just 0.2% – the slowest monthly rise since 2021. On a year-on-year basis, the shelter component of CPI slowed from 4.9% to 4.7%, marking its slowest pace since 2022. Excluding shelter, CPI was only 1.6% higher over the past 12 months.
The “supercore” services components (which exclude shelter) were also encouraging. Transportation services remained flat in November, helped by easing inflation in airline fares, while medical care services inflation fell slightly (Figure 2).
Figure 2: Core services show encouraging progress
Source: Macrobond, Bureau of Labor Statistics, Bloomberg, Insight, December 2024
Trade policy remains a wildcard over the coming years
Markets are still trying grappling with the potential impact of the incoming administration’s proposed trade and tariff policies. An index maintained by Economic Policy Uncertainty which tracks US trade policy uncertainty through newspaper coverage and professional economic forecasts, has recently spiked to an all-time high (Figure 3).
Despite this, we suspect that the effects of President-Elect Trump’s policies will take time to permeate the economy. Therefore, they are unlikely to be a near-term consideration for the Fed as it continues its rate cutting cycle.
Figure 3: Trade policy uncertainty index has spiked since the election
Source: Macrobond, Economic Policy Uncertainty, https://www.policyuncertainty.com/trade_uncertainty.html
We expect the Fed to stay the course over the near term
Inflation is still fundamentally trending in the right direction in our view. While trade policy will be a medium to longer-term consideration for the Fed, we expect the central bank to continue its rate cutting cycle over the coming months.
