Expectations are stable but there may be variables; will CPI disrupt the Federal Reserve's rate cut rhythm?

On December 11th, Wednesday at 21:30, the United States will release the latest Consumer Price Index (CPI) data. Market forecasts suggest that the CPI for November will show inflation performance remaining relatively stable. Since inflation peaked in the summer of 2022, the upward pressure on prices in the United States has significantly eased, but as inflation approaches the Federal Reserve's target, the rate of decline has noticeably slowed.

A Reuters survey shows that economists expect the overall CPI annual rate to record 2.7%, slightly higher than the previous value by 0.1 percentage points, with a monthly rate of 0.3%; the core CPI annual rate is expected to record 3.3%, with a monthly rate of 0.3%.

Josh Hirt, a senior U.S. economist at Vanguard, stated, “The data from the past month has not changed significantly.” He pointed out that the overall inflation rate is currently fluctuating within the range of 2.5%-3.0%. He believes that the progress of inflation's decline has slowed, which can partly be explained by base effects, as last year's data was relatively weak, making this year's figures appear stronger, while also reflecting ongoing inflationary pressures in areas such as services and housing. He expects the core CPI monthly rate for November to be 0.25%, slightly below market consensus.

The pace of inflation decline is expected to slow, facing new resistance to the Federal Reserve's target

Goldman Sachs analysts expect that the price increases in categories such as used cars, airline tickets, clothing, and auto insurance will exert upward pressure on inflation in November. Additionally, food and energy prices have also risen. Their forecast is for core CPI to grow by 0.28%, consistent with market consensus.

Hirt noted that housing inflation has been a major driver of inflation for the past year and a half, and it is likely to remain high in November, “We do not expect housing prices to see substantial slowing until next year.” He anticipates that in the coming months, the rate of price increases for goods will slow down. At the same time, he is particularly focused on service inflation, believing that recent strong wage growth may keep service inflation sticky. “If wages continue to grow strongly,” Hirt said, “it will be difficult to keep service inflation consistently at the 2% level.”

Economists at Wells Fargo stated that despite some progress in recent months, the path to achieving the Federal Reserve's inflation target by 2025 looks “increasingly difficult.” They pointed out in a research report last week that potential tariffs and tax cuts could become new obstacles.

Trump's policies lead to rising consumer inflation expectations

U.S. media reports indicate that in the December survey, 20% of American consumers spontaneously mentioned tariff issues, and those who mentioned tariffs had a much worse outlook on business conditions. Two months ago, only 2% of people spontaneously mentioned tariffs.

“Democrats believe that tariffs will lead to a resurgence of inflation, while Republicans believe that inflation will significantly slow down,” former Federal Reserve economist Joanne Hsu pointed out the significant divide between the two parties on tariff issues. Many mainstream economists warn that Trump's plan to impose broad tariffs on allies and trading partners could significantly raise consumer prices. Under the shadow of Trump's tariff plan, a survey by the University of Michigan shows that the index of conditions for purchasing durable goods has risen, which measures consumers' willingness or confidence in buying durable goods. These durable goods include large consumer items such as refrigerators and cars, which typically have a long lifespan. Joanne analyzed:

"This is not a sign of a strong economy. People think now is a good time to buy durable goods because they expect prices to soar next year—they want to avoid that."

Trump has repeatedly stated that his trade agenda will not reignite inflation. His supporters view the threat of tariffs as part of a negotiation strategy rather than a policy that will ultimately be implemented. Nevertheless, the University of Michigan's survey found that all consumers' inflation expectations for the coming year rose to a six-month high in December, but still remain far below previous historical highs.

Theoretically, these differing views could have a significant impact on the U.S. economy, as it largely relies on consumer spending. If a portion of people reduces their shopping or travel expenditures, it would hit businesses hard and lead to layoffs.

Of course, just because people express concerns about the economy does not mean they will actually change their consumption behavior. For example, on "Cyber Monday" (similar to Double Eleven), Americans still splurged regardless of political leanings, creating a record online shopping amount of $13.3 billion, making it the largest single day in history.

How Will CPI Data Affect the Fed's Rate Cut Path?

The CPI data released tonight will be the last major economic data received before the Fed's meeting next week. According to CME's "FedWatch," the probability of a 25 basis point rate cut by the Fed in December has exceeded 85%.

Analysts believe that if inflation sees a significant surge, it may prompt the Fed to pause its rate cut cycle this month, but investors generally believe that the inflation data for November will not reach that threshold. Hurt stated, if the overall CPI month-on-month rate exceeds about 0.3%, it may prompt the Fed to pause rate cuts.

Looking ahead to 2025, the market expects there could be up to three additional rate cuts next year, provided inflation continues to decline. Economic data such as CPI will play a key role in shaping policy expectations. As inflation data evolves, the Fed's statements and responses will guide market sentiment throughout the year.

Rating agency Fitch warns that unexpectedly strong consumer spending, combined with anticipated tariff increases (which will raise import prices) and reduced immigration (which will push up labor costs), the threat of inflation in the U.S. is intensifying. The agency stated: "Crackdowns on immigration may reduce labor supply growth, thereby exacerbating inflation, and we have raised our inflation expectations for the U.S." However, the agency still expects the Fed to cut rates by 125 basis points in 2025, but does not expect any cuts in 2026.

Source: Jin Shi Data