November CPI Report: Inflation’s Path and the Fed’s Next Moves

The Consumer Price Index (CPI) report for November, set for release on December 11, will provide crucial insights into the Federal Reserve’s progress toward its 2% inflation target. While inflation has eased substantially from its peak, questions remain about when—or if—it will settle at the Fed’s desired level.

Inflation Nowcasting: What to Expect

Preliminary estimates from the Cleveland Federal Reserve suggest mixed signals for November:

• Headline inflation may tick up slightly to a 2.7% annual rate, compared to 2.6% in October.
• Core inflation, which excludes volatile food and energy prices, is expected to hold steady at 3.3%.

While these figures indicate progress from earlier highs, they may not provide the reassurance the Federal Reserve seeks. With the labor market still a significant factor in the Fed’s considerations, the central bank is expected to continue cutting interest rates at a measured pace, likely starting in 2025.

The Role of Tariffs

President-elect Donald Trump’s proposed tariffs on China, Mexico, and Canada, slated for January 2024, could add complexity to the inflation outlook. Tariffs typically raise the prices of imported goods, potentially pushing inflation higher in the short term.

Neel Kashkari, President of the Minneapolis Fed, highlighted the uncertainty around tariffs. Speaking to CBS on November 10, he noted, “If somebody imposed a 1% tariff or a 10% tariff, you would think that that would increase prices of those goods either 1% or 10%. That’s pretty easy to model, and it shouldn’t have an effect long run on inflation. The challenge becomes, if there’s a tit for tat… that’s where it becomes more concerning.”

While tariffs may slow progress toward the 2% inflation target, the Fed is unlikely to adjust interest rates for what could be a one-time price increase.

Housing’s Impact on Inflation

Shelter costs, which account for over 36% of the CPI index, remain a key driver of inflation. In October’s CPI report, home prices rose at an annual rate of nearly 5%, keeping upward pressure on overall inflation. If home prices begin to decline, as some analysts anticipate, inflation could move closer to the Fed’s target. However, recent data shows little evidence of such a trend.

The Fed’s December Decision

The Federal Reserve’s upcoming December 18 meeting will be closely watched. Fixed-income markets currently suggest a slight edge in favor of an interest rate cut over holding rates steady. The decision will hinge on two key factors:

1. Inflation Data: A slower-than-expected rise in inflation could bolster the case for a rate cut.
2. Jobs Market Trends: Unexpected weakness in the labor market could also tilt the Fed toward easing monetary policy, even if inflation remains above 2%.

The November CPI report is poised to shape expectations for both inflation’s trajectory and the Federal Reserve’s next steps. While incremental progress has been made, factors like tariffs, housing costs, and labor market data will determine how soon—and how smoothly—the Fed can achieve its 2% inflation goal.