U.S. Inflation Decline Set to Slow

As we approach the critical December 11th deadline for the release of the U.SConsumer Price Index (CPI) data, concerns loom over inflation rates and their potential impact on the Federal Reserve's monetary policyScheduled to be unveiled at 9:30 PM Beijing time, this announcement is crucial not only for investors but also for policymakers who will be convening for a much-anticipated meeting from December 17th to 18thWith so much at stake, the market is directed to scrutinize CPI figures closely in the context of interest rate decisions.

Predictions surrounding the November CPI suggest that there might be a modest uptick in year-over-year inflation, potentially rising from October's 2.6% to 2.7%. Monthly comparisons also point towards an increase from 0.2% to 0.3%. Core CPI, which excludes volatile food and energy costs, is expected to maintain its robustness at 3.3% year-on-year, consistent with the prior month and well above the Federal Reserve's inflation target of 2%. This tenacity in core inflation is notable as it has remained within a narrow range of 3.2-3.3% for more than half a year now.

Forecasters have drawn attention to the implications of these CPI figures, suggesting that a lower-than-expected release could result in an increased probability of a rate cut by the Federal Reserve

This could consequently exert ongoing downward pressure on the dollarConversely, data that exceeds market expectations may mitigate investor hopes for a significant rate cut in 2025, potentially providing a lift to the greenback.

The deceleration of inflation appears to be slowing, according to seasoned analystsJosh Hirt, a prominent economist, articulated that changes from October to November are unlikely to show significant variation, with inflation remaining contained within the 2.5-3.0% rangeThis persistence in inflation rates can be attributed in part to base effects; last year's figures were relatively low, stitching inflation tighter in the current yearService costs, particularly in housing, are posing continuing upward pressure on pricesIt is projected that core CPI will show a monthly increase of approximately 0.25%.

Furthermore, a recent inflation forecasting model from the Cleveland Federal Reserve suggests a month-on-month increase of 0.26% for the overall inflation, aligning closely with prevailing market expectations of a 2.7% annual increase, while core CPI is anticipated to rise 0.27% month-on-month and maintain a yearly growth rate of 3.3%.

Housing costs remain a core component of CPI, with expectations for owners' equivalent rent to increase by 0.33% month-on-month, compared to 0.40% in October

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Rent prices are predicted to maintain an unchanged increase of 0.28%. The trajectory of housing inflation has significantly influenced predominant inflation trends, and this month is anticipated to uphold elevated pressures.

High inflation risks still linger for 2025, despite recent cooling in inflationary trendsA survey conducted by the New York Federal Reserve revealed rising consumer expectations for inflation across various timeframes, indicating increasing concerns among the populace about future economic conditionsThe one-year inflation expectation has jumped to 3%, up from 2.9% in October, while three-year expectations have reached 2.6% from 2.5%, and five-year expectations climbed slightly to 2.9% from 2.8%.

With the market firmly eyeing the Federal Reserve's likely reaction, the probability of a 25 basis point rate cut in December has soared beyond 80% as per swap market analyses

However, some experts caution that room for significant cuts may be limited, suggesting the Federal Reserve's earlier forecasts predicting a full 100 basis points of rate relief next year may be overly ambitious.

The CME Federal Reserve watch tool indicates an 86% likelihood for a 25 basis points cut this monthShort-term economic cooling is seen supporting continued reductions in interest rates, yet persistent wage inflation and rising consumer inflation expectations could complicate future easing effortsThe Federal Reserve’s dual mandate of maximizing employment while ensuring price stability remains at the forefront of their agenda, despite a sudden drop from higher inflation rates seen in earlier years.

The situation remains fluidShould the CPI data unexpectedly surpass expectations by a wide margin, we could witness significant shifts in the Federal Reserve's decennial plans, potentially derailing planned rate cuts

On the other hand, financial giants like Morgan Stanley remain steadfast in their view that a 25 basis point reduction is on the horizon, regardless of the CPI report's outcome, unless it showcases extreme deviations.

Investors are also gauging market sentiments leading up to this significant announcementMona Mahajan, an investment strategist at Edward Jones, noted a prevailing sense of caution, with market participants reluctant to act aggressively until more definitive data emergesThe S&P 500 index's reaction to the CPI is anticipated to hinge closely on the core inflation figuresAs quantified by analysts, a core CPI increase above 0.4% could prompt a decline in the S&P 500 by about 1.2%, while a rise within the 0.35%-0.39% range may result in a smaller contraction of 0.5%.

In contrast, if the core CPI growth is less than expected, the market might regard the Federal Reserve’s potential for a "dovish" stance on monetary policy as a bullish sign for gold prices