November Inflation Data Takes Center Stage Ahead of Fed Meeting: Will Disinflation Excitement Persist?

All eyes are on the Consumer Price Index (CPI) data for November, which will be released on Tuesday at 08:30 a.m. ET.

This pivotal economic indicator is set to steal the spotlight this week, perfectly aligning with the kick-off of the Federal Open Market Committee (FOMC) meeting.

The stage is undoubtedly prepared for what might turn out to be an eventful Fed December meeting.

November CPI Preview: What Are Economists Expecting?

• According to the consensus among economists, the annual CPI inflation rate is projected to slightly ease from 3.2% in October to 3.1% in November. Should the data align with these expectations, it would mark the slowest annual rate of inflation since June. If inflation drops to, or below, 3%, it could signify the slowest pace since March 2021, when it stood at 2.6%.
  
• Every month, the CPI is anticipated to remain flat, mirroring its October performance.
  
• Bank of America, which aligns with the consensus view on the November CPI report, has emphasized that the primary factor driving their anticipation of a subdued headline figure is the notable decline in energy prices, particularly a significant drop in gasoline prices during November. They anticipate that this decline should sufficiently counterbalance a steady rise in food prices and a 0.3% uptick in core inflation.
  
• When we exclude the volatile energy and food components, the core CPI annual rate is forecasted to hold steady at 4%. A data point in line with these forecasts would confirm the lowest core inflation rate since September 2021. However, it would also bring to an end a streak of seven consecutive declines in the annual inflation rate.
  
• Breaking it down to a monthly perspective, core inflation is expected to show a slight uptick, rising from 0.2% in October to 0.3% in November.

Market Reactions To Previous CPI Release

Recalling the October CPI data, which was released on Nov. 14, the year-on-year inflation rate came in at 3.2%, down from September’s 3.7% and falling short of the 3.3% forecasted by economists. Core inflation printed at 4% year-on-year, a slight dip from the previous and expected 4.1%.

Market reactions to this data were notable:

• The SPDR S&P 500 ETF Trust SPY rose by 1.9%.
• The Invesco QQQ Trust QQQ saw a 2.1% increase.
• The iShares 20+ Year Treasury Bond ETF TLT experienced a 2.3% increase.
• The Invesco DB USD Index Bullish Fund ETF UUP tumbled by 1.6%.

Inflation Vs. Interest Rates

In addition to the interest rate decision, the December FOMC meeting will unveil updates on economic projections, including the Fed’s outlook for gross domestic product (GDP) growth, the unemployment rate, and inflation.

In the September projections, the Fed estimated that Personal Consumption Expenditure (PCE) inflation would average 2.5% in 2024, 2.2% in 2025, and eventually reach 2% in 2026. Core inflation was expected to decline to 2.6% in 2024, 2.3% in 2025, and 2% in 2026.

However, the Fed’s outlook on interest rates stood in stark contrast to the current market sentiment, which is brimming with optimism regarding potential rate cuts in 2024.

Investors are pricing in a substantial 110 basis points of rate cuts by December 2024, equivalent to five cumulative 25-basis point reductions, with the first expected as early as May.

In September, the Fed had projected a decline in the Fed funds rate from 5.6% in 2023 to 5.1% in 2024. It appears highly likely that these estimates will undergo downward revisions. This adjustment stems from the fact that the Fed won’t announce the additional rate hike initially forecasted for the current year, and there may even be room for additional rate cuts expected for 2024.

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