Inflation Concerns Persist Despite Fed Rate Hike Signals

Fernando Maluf•12/12/2024
Inflation Concerns Persist Despite Fed Rate Hike Signals

Inflation Headwinds Complicate Fed's Path

The Federal Reserve appears poised to proceed with another interest rate cut at its upcoming December meeting, according to recent economic data and market pricing. However, stubbornly high inflation readings are raising concerns about the central bank's ability to continue easing monetary policy in the face of slowing growth.

CPI and PPI Show Elevated Price Pressures

The Consumer Price Index (CPI) for November came in hotter than expected, with the overall measure rising 0.4% month-over-month, pushing the 12-month increase to 2.7%. While the core CPI, which excludes volatile food and energy components, matched estimates with a 0.3% monthly rise, the annual core inflation rate held steady at an elevated 3.3%.

Even more concerning for the Fed was the latest Producer Price Index (PPI) report, which showed wholesale inflation accelerating more than anticipated. The PPI climbed 0.4% in November, double the 0.2% consensus forecast, marking the sharpest annual increase of 3% since February 2023.

"The Fed doesn't have to sweat about cutting rates next week after some encouraging inflation details. The post Fed Gets Green Light For Rate Cut From CPI, PPI, Jobless Claims; S&P 500 Pauses appeared first on Investor's Business Daily."

Sticky Services Inflation a Worry

A deeper dive into the CPI data revealed that services inflation, which tends to be more persistent, remained stubbornly high. Core services prices rose 0.3% for the second consecutive month, keeping the 12-month rate at an elevated 4.6%.

Of particular concern for the Fed is the trend in owners' equivalent rent, which accounts for a significant portion of the central bank's preferred inflation gauge, the core Personal Consumption Expenditures (PCE) price index. While owners' equivalent rent moderated to a 0.2% monthly increase in November, it remains a potential upside risk to the Fed's inflation target.

Rate Cut Still Expected, but Future Path Uncertain

Despite the elevated inflation readings, markets still anticipate the Fed will proceed with a quarter-point rate cut next week, the third consecutive reduction this year. However, the outlook for further easing in 2025 has become cloudier, with traders pricing in just a slightly higher probability of two additional cuts versus three.

"Inflation remains a significant concern, with rising expectations suggesting potential Fed rate hikes in 2025, shifting focus from cuts to increases. The 2-year inflation swaps indicate inflation may stall or rise, potentially leading to higher interest rates and tighter monetary policy." - Paul Souders, Seeking Alpha contributor

Quotes and Market Reaction

Seema Shah, Chief Global Strategist at Principal Asset Management, commented on the inflation reports:

"The CPI report likely confirms a Fed policy cut next week but, with monthly core inflation hitting its strongest rate since the inflation scare of early 2024, price pressures are hardly settling at a level that the Fed can be completely at ease with."

Shah highlighted the "good news" of moderating owner equivalent rent inflation but added, "overall, the Fed will be concerned by the very stubborn nature of inflation and will be increasingly cautious about the upside inflation risks that President-Elect Trump's policies may bring."

The S&P 500 dipped 0.1% in early Thursday trading after rallying 0.8% the previous day on the CPI release. Year-to-date, the index is up an impressive 27.6%, fueled by expectations of continued Fed easing and optimism surrounding the incoming Trump administration's pro-business policies.

Balancing Act for the Fed

As the Federal Reserve weighs its next policy move, it finds itself in a delicate position. While economic growth has moderated, justifying further rate cuts to provide stimulus, the persistence of elevated inflation complicates the decision-making process.

The central bank must carefully balance the risks of allowing inflation to become entrenched against the potential consequences of overtightening and exacerbating the economic slowdown. Market participants will closely scrutinize the Fed's language and updated economic projections for clues about the likely path of interest rates in the coming year.

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