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The economy faces a complex situation: on the one hand, the data shows inflation remaining contained in some key aspects, but on the other hand, certain signals create uncertainty about how the Fed will manage inflationary risks and its full employment mandate in the coming months.
Recent CPI report figures
The Department of Commerce reported that the overall CPI increased by 2.7% year-on-year in November 2024, a slight increase from 2.6% in October and the highest level since July.
On a monthly basis, prices rose by 0.3%, surpassing the 0.2% increase from the previous month. This increase occurred despite a 2.63% drop in gasoline prices, highlighting that other sectors are contributing to inflationary pressures.
As for core inflation, which excludes volatile components like food and energy, it remained at 3.3% year-on-year, matching Wall Street’s forecasts and marking its lowest level in three years. The monthly increase was also 0.3%, in line with expectations and the October figure.
Market reactions and expectations
The publication of the report generated immediate movements in financial markets. Futures tied to the S&P 500 recorded a gain of 25 points at the open, while the Nasdaq gained 125 points. On the other hand, the yields of two-year and ten-year Treasury bonds decreased slightly, settling at 4.126% and 4.232%, respectively. These movements reflect renewed confidence in a rate cut during the Fed’s meeting scheduled for next week.
The CME FedWatch index, which measures market expectations regarding Fed decisions, showed an increase in the probability of a 25 basis point rate cut, rising from 86% before the report to 97.9% after its release. This figure starkly contrasts with the 65.3% observed earlier in November, indicating a significant shift in investor sentiment.
Economic implications and risk factors
Seema Shah, global strategist at Principal Asset Management, highlighted that although the CPI report supports a rate cut, the persistence of certain inflationary pressures, such as housing sector prices, could lead the Fed to adopt a more cautious stance in 2025. According to Shah, the combination of a robust labor market and inflationary risks stemming from the next government’s policies, such as proposed trade tariffs by elected President Donald Trump, could force the Fed to reevaluate its approach.
Furthermore, the November jobs report reflected 227,000 new hires and a 4% year-on-year wage growth, exceeding Wall Street expectations. However, the unemployment rate rose to 4.2%, and the labor force participation rate slightly decreased to 62.5%, signals that could moderate the Fed’s urgency to act against inflation.
In essence, the November CPI report reaffirms the inherent tension in the Fed’s dual responsibility: ensuring price stability and maximizing employment. Although the data suggests that inflation is moderating, structural and political risks persist that could alter the economic landscape. Caution will be key for the Fed, which faces the challenge of balancing rate cuts with the possibility of inflationary resurgence in an uncertain geopolitical and economic environment.
The decision next week could be crucial for the markets, but also for the overall confidence in the economy. The central question is whether a more aggressive or prudent approach will stabilize the economic system without sacrificing growth.
At this moment of uncertainty, the responsibility falls on policymakers to make decisions that balance short-term and long-term goals.
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