U.S. Consumer Prices Rise, Fed Expected to Cut Rates

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. consumer prices increased in November by the most in seven months, yet the Federal Reserve is still expected to deliver a third consecutive interest rate cut next week to support a cooling labor market.

Progress in lowering inflation toward the U.S. central bank’s 2% target has virtually stalled. The report from the Labor Department on Wednesday also showed no improvement in the measure of underlying price pressures over the past four months.

Despite persistently high inflation, some encouraging news emerged: rents, a stickier component of inflation, rose at the slowest pace in nearly 3-1/2 years. Additionally, the rise in motor vehicle insurance, another troublesome category, moderated, contributing to a slowdown in services inflation.

A sustained cooling trend would bode well for inflation outlooks, although looming tariffs from President-elect Donald Trump’s incoming administration pose a threat.

> “Some Fed officials will likely take solace in the improvement in services and housing inflation,” said Scott Anderson, chief U.S. economist at BMO Capital Markets. “That said, the Fed will need to see more improvement on the inflation front in the months ahead, if its plan for a steady pace of additional rate cuts next year is to be fulfilled.”

The consumer price index (CPI) rose 0.3% last month, the largest gain since April, after advancing 0.2% for four consecutive months, according to the Labor Department’s Bureau of Labor Statistics.

A 0.3% increase in the cost of shelter, mostly hotel and motel rooms, accounted for nearly 40% of the rise in the CPI. Shelter costs itself rose 0.4% in October. Lodging away from home surged 3.7%, the highest since October 2022, following a 0.5% rise in October.

Food prices increased 0.4% after a 0.2% rise in October, with grocery store food prices surging 0.5%. The cost of eggs spiked 8.2% due to an avian flu outbreak. Meanwhile, beef prices also rose, while cereals and bakery products fell by 1.1%, the most since the government began tracking the series in 1989. Gasoline prices rebounded by 0.6%, while piped gas surged 1.0%.

In the 12 months through November, the CPI climbed 2.7%, slightly up from 2.6% in October. This rise was in line with economists’ expectations.

The annual increase in inflation has slowed considerably from a peak of 9.1% in June 2022, prompting the Fed to focus more on the labor market. Job growth accelerated in November, recovering from disruptions caused by strikes and hurricanes in October. However, the unemployment rate ticked up to 4.2% from 4.1%, which had held steady for two months.

CORE INFLATION STUCK

Excluding the volatile food and energy components, the CPI increased 0.3% in November, matching the increase for the fourth consecutive month. Rents increased by 0.2%, the smallest since July 2021.

> “Residential rental prices as captured in CPI might finally be displaying the slowdown long flagged by real-time rent prices,” said Kathy Bostjancic, chief economist at Nationwide. “This is significant.”

The cost of motor vehicle insurance edged up 0.1%. Airline fares rose by 0.4% after a significant increase of 3.2% in October.

Healthcare services costs rose 0.4%, and overall services increased by 0.3%, nudging up by 0.1% when excluding rent costs. Goods prices rose 0.4% after remaining unchanged the previous month, driven by higher new and used motor vehicle prices, likely as residents in the Southeast replaced vehicles damaged by hurricanes.

In the 12 months through November, the so-called core CPI gained 3.3%, equating to the advance in October. Over the past three months, the core CPI averaged a 3.7% annualized rate.

Based on the CPI data, economists estimate that the core personal consumption expenditures (PCE) price index rose by 0.2% in November, following a 0.3% rise in October. Core inflation is forecast to increase by 2.9% year-on-year, compared to 2.8% in October, partly because of unfavorable base effects.

These estimates could change following the release of November’s producer price data scheduled for Thursday.

Despite the lack of progress on inflation, investors were reassured by the moderation in rent costs and steady core inflation.

Stocks on Wall Street traded mostly higher, the dollar rose against a basket of currencies, and U.S. Treasury yields fell.

Financial markets have almost fully priced in a quarter-percentage-point rate cut at the Fed’s Dec. 17-18 policy meeting, as indicated by CME Group’s FedWatch Tool. Before the inflation data release, the odds were roughly 86%.

Economists anticipate that policymakers will signal fewer rate cuts in 2025 when they update their economic projections next week. Although slower inflation is forecast next year as rent costs cool further and labor market slack increases, this could be offset by higher prices due to tariffs and anticipated immigration policies under Trump.

The Fed commenced its monetary policy easing cycle in September, resulting in a current benchmark overnight interest rate range of 4.50%-4.75%, following a 5.25 percentage point hike from March 2022 to July 2023 to tackle inflation.

> “The lack of meaningful progress on inflation means that in their summary of economic projections, Fed officials are likely to signal just three rate cuts in 2025, versus the four they projected in September,” stated James Knightley, chief international economist at ING.