Underlying inflation could squash the Fed's 2025 plans
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The good news in the latest inflation data is that it was pretty much as expected, which is enough for the Fed to cut interest rates next week. The bad news is that underlying inflation has flatlined, throwing into question what's to come in the new year.
Why it matters: If the data doesn't show a more decisive downward move in inflation soon, it will scramble the Fed's plans to continue cutting rates in 2025.
- The back half of 2024 has shown precious little progress.
- Ultimately, forecasts of continued disinflation alone won't be enough for a central bank determined to achieve its 2% target.
Driving the news: The Consumer Price Index rose 2.7% over the 12 months ended in November, the Labor Department said Wednesday, ticking up from 2.6% in October.
- More worryingly, core inflation (excluding food and energy) — which tends to offer a better view of underlying inflation trends — has now been stuck at 3.3% for three consecutive months.
- Core CPI rose at a 3.7% annual rate over the last three months, the highest since April.
State of play: In good inflation news, there was finally some relief in housing inflation, with rents rising only 0.2% — the lowest monthly reading in more than three years.
Yes, but: Grocery costs were up 0.5% last month, including a particularly steep rise in the prices of beef (up 3.1%) and eggs (up a startling 8.2%).
- To whatever extent the 2024 election was a referendum on the price of eggs, Democrats' losses should be no surprise, given that they were 37.5% more expensive in November than a year earlier.
Between the lines: The CPI runs somewhat higher than the Personal Consumption Expenditures Price Index that the Fed targets. But the recent numbers remain too high for the Fed's comfort.
- In September, the median Fed official anticipated cutting interest rates twice more in 2024, followed by a full percentage point of cuts in 2025.
- The 2024 projections look likely to come true when the central bank meets next week, with another quarter-point rate cut underway. But when officials update their projections, which are to be released next Wednesday afternoon, they're likely to signal a more cautious approach to 2025.
The bottom line: "While nobody should have expected progress toward the inflation target to be linear, I think the Fed will eventually need to see renewed downward momentum in order to justify the additional easing they have described for next year," wrote Eric Winograd, director of developed market economic research at AllianceBernstein.
