Stable Consumer Prices, Potential Impact of Falling Gasoline Prices

Consumer prices are expected to remain unchanged for the second consecutive month, as the decrease in gasoline prices offsets the increases in used car and hotel room costs. This anticipated trend is likely to prompt the Federal Reserve to maintain their current interest rates this week. However, before committing to any interest rate cuts early next year, officials will likely seek further progress.

Economists predict that the consumer price index (CPI) will experience a 3.1% annual growth rate in November, according to consensus expectations from FactSet. This projection indicates a slight decline from the 3.2% recorded in October. On a month-over-month basis, economists expect that headline inflation will remain steady, matching the 0.0% change observed in October.

The CPI data will be released by the Labor Department at 8:30 a.m. on Tuesday.

Core CPI, which excludes the volatile food and energy indexes and is considered a more reliable indicator of underlying price growth, is expected to increase. Economists anticipate a 0.3% rise in core prices in November, slightly higher than the 0.2% increase observed in October. This would result in an annual pace of 4%, consistent with the previous month.

The inflation report will be of great significance this month because it will be the final major data set released before the Federal Reserve's December policy meeting, taking place from Tuesday morning to Wednesday afternoon. If the report aligns with expectations, it is unlikely to sway the central bank from maintaining the current interest rate range of 5.25% to 5.5%. This is especially true as officials have recently indicated their intention to keep rates steady this month.

As of Monday afternoon, investors were pricing in a more than 98% chance of no rate increase on Wednesday.

Bank of America economist Michael Gapen stated in a client note on Monday that "November CPI should not change the narrative."

However, the November inflation data could impact expectations regarding the Fed's timeline for interest rate cuts next year. Consequently, Tuesday's report may temper assumptions about how quickly the central bank will transition rates out of restrictive territory.

Potential Impact of Falling Gasoline Prices on Price Growth

Economists anticipate that headline price growth will remain steady in November, primarily due to the decline in gasoline prices. While this is good news for consumers, it does not provide a comprehensive outlook on underlying inflation. The central bank places greater importance on evaluating broad-based inflationary pressures rather than focusing solely on changes in gasoline costs.

Influential Factors in Core Inflation

In November, used car and hotel room prices are projected to lead to an increase in core inflation, following notable slowdowns in the previous month. Rent costs are also expected to rise by an estimated 0.4% for the month, along with an equivalent measure for homeowners.

Furthermore, a specific category of core services called "supercore" services, excluding rent, has drawn significant attention from the Federal Reserve. This category is predicted to experience a doubling of its monthly rise, reaching a climb of 0.4% in November. In comparison, supercore services had only increased by 0.2% in October.

Timing of Inflation Report and its Relationship with Employment Data

The release of the inflation report closely follows the strong November jobs report, which revealed the addition of 199,000 jobs and a decrease in unemployment to 3.7%. Alongside a robust core Consumer Price Index (CPI) reading, this combination might dissuade investors from their growing expectation that the central bank will initiate rate cuts as early as March next year.

Mark Dowding, the BlueBay chief investment officer at RBC Global Asset Management, stated that he believes the market's enthusiasm for rate cuts has become exaggerated. He emphasized that financial conditions have significantly improved and suggests that unless there is substantial data indicating softer payrolls or inflation, the upcoming Fed meeting is unlikely to result in a revision in tone.