A note from BMO on US CPI data, with analysts there saying November's headline CPI gain of 0.308% has reinforced expectations for a Federal Reserve rate cut next week, but continued inflationary pressures suggest a slower pace slow in 2025. Four consecutive months of gains of 0.3% in the underlying index have moved the annual three and six month levels to multi-month highs, highlighting the continued persistence of inflation.
The analysts go on to say that the three-month seasonally adjusted annual rate (SAAR) climbed to a seven-month high of 3.7%, a notable rebound from the cycle low of 1.6% in July. Similarly, the six-month SAAR rose to 2.9%, marking a five-month high and up from the cycle low of 2.6% in October. Adding to the Fed's concerns, basic commodities posted a strong increase of 0.308%, the biggest monthly gain since May 2023. Although some analysts argue that this spike may be overstated, nevertheless complicating the Fed's inflation statement.
On a more positive note, signs of cooling emerged in some more stable inflation sectors, particularly within core services. Core services inflation eased to 0.276%, boosted by a sharp slowdown in shelter costs. Direct rent increased 0.21%, its smallest monthly increase since April 2021, while owner equivalent rent (OER) advanced 0.23%, its smallest increase since January 2021.
These trends align with Fed Chairman Jerome Powell's view that the rising inflation in housing services is largely a “catch-up” phenomenon, reflecting past inflationary pressures rather than ongoing ones. Powell's view may provide some reassurance to policymakers as they navigate a delicate balance between managing persistent inflation and supporting economic growth.
While a rate cut is likely to be forthcoming, the data highlights the challenges facing the Fed, as inflation dynamics remain uneven across sectors. With key inflation metrics still elevated, the Fed's move toward a more gradual pace of rate cuts in 2025 seems more likely.
—
Sticky high inflation seems to me to be a reason not to cut, but I seem to be out of touch.
My concern found expression in this I posted earlier, giving it a re-run now.
