The November US CPI report showed disinflationary progress further stalling last month, though the figures shouldn’t deter the FOMC from a 25bp cut at this year’s final meeting next Wednesday.
Headline inflation rose 2.7% YoY last month, in line with consensus, albeit the highest such level since July, while core prices rose 3.3% YoY, for the third consecutive month.
Meanwhile, on an MoM basis, both headline and core CPI rose 0.3%, bang in line with expectations.
Nevertheless, the figures seem highly unlikely to materially shift the near-term FOMC policy outlook.
With risks to each side of the dual mandate now seen as roughly in balance, it is developments in the labour market which hold the key to policymakers’ reaction function, as opposed to the continued bumpy disinflationary trajectory.
As a result, a 25bp cut next week remains the base case, with said case having been cemented by the unexpected rise in unemployment, to 4.2% in November, evidenced in last Friday’s jobs report.
However, risks around the monetary policy outlook are set to become increasingly two-sided in the first quarter of next year. Chiefly, policymakers will be concerned about the potential upside inflation risks stemming from incoming President Trump’s tariff plans, as well as the broader reflationary fiscal stance, whereby strong demand could further fuel price pressures.
When combined with continued bumpy progress back towards the 2% target, and were the labour market to remain tight, this could open the door to a ‘skip’ at either the January or the March FOMC meetings.
On the whole, the pace of policy normalisation is likely to be much slower in 2025, with the FOMC plotting a more deliberate course as rates move closer to a neutral level, likely around 3%. This, in addition to the upside inflation risks alluded to above, is likely to mean that the forceful ‘Fed put’ seen throughout 2024 is unlikely to be present to the same extent next year, potentially posing a modest headwind for equities to overcome, even though the path of least resistance should continue to lead to the upside.
