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Market Braces for Key Inflation Insights from November CPI Report

By:
James Hyerczyk

November CPI crucial for Fed's rate decisions; stable headline CPI but high core inflation; Fed seeks more evidence for rate cuts.

CPI Report

Highlights

  • November CPI could signal easing inflation, impact Fed rates.
  • Core CPI rise contrasts with headline inflation’s expected stability.
  • Fed’s cautious stance remains despite market optimism on inflation.

The Consumer Price Index (CPI) data for November 2023, set for release on December 12 at 13:30 GMT, is garnering substantial market attention. This eagerly awaited release is considered crucial, as it may provide indications of diminishing inflation, which could significantly impact the Federal Reserve’s rate decisions in the upcoming spring season.

CPI Expectations Amid Market Optimism

Forecasts point towards a stable headline CPI, with monthly figures expected to remain flat and an annual increase pegged at 3%, according to the Cleveland Fed’s nowcasts. The moderation in headline inflation is largely attributed to declining energy prices, reflecting the dynamic interplay of global energy markets and domestic economic policies. Conversely, the core CPI, which strips out food and energy costs, is anticipated to rise by 0.3% monthly and 4% annually, signaling persistent underlying inflationary pressures that exceed the Federal Reserve’s 2% target. These contrasting trends in headline and core inflation readings are key factors for traders and policy makers to consider.

Particular attention will be paid to services inflation, driven by a solid labor market. Wages, being a significant component in service delivery costs, could continue to drive prices up. Additionally, there’s an emerging narrative of deflation in certain goods. This trend, evident in recent car prices and general commodity pricing, could counterbalance inflationary pressures in other areas. Another critical element in the CPI calculation is shelter costs. These costs are expected to show signs of moderation or even decline, as rising mortgage costs impact housing affordability. The October CPI data already indicated a slowdown in shelter cost increases, suggesting a potential deceleration trend into 2023.

Federal Reserve’s Analytical Approach

While the market is leaning towards a more optimistic outlook on inflation control, the Federal Reserve maintains a cautious stance. The central bank is looking for more substantial evidence of inflation steering back to its 2% goal. The Fed’s concern lies in the possibility of inflation stabilizing above the 2% mark, with further disinflation progress being slow. The robust jobs market and strong economic growth also raise concerns about continued inflationary pressures.

Short-term Outlook and Policy Implications

The CPI report for November, though crucial, may not be decisive in shaping the Fed’s immediate policy direction. A further cooling of inflation would be a welcome trend, yet the Fed is likely to seek more comprehensive data before considering any shift towards interest rate cuts.

Markets are increasingly betting on rate reductions, but the Fed’s decision will depend on a thorough evaluation of economic indicators, with the upcoming CPI data playing a significant role. The Federal Reserve’s rate decision, following closely after the CPI release, will be closely watched for indications of their assessment and future policy trajectory.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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