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US inflation ticked up to 2.7 per cent last month, matching Wall Street’s forecasts and clearing the way for an expected Federal Reserve rate cut next week.
Wednesday’s data from the Bureau of Labor Statistics was in line with the expectations of economists polled by Bloomberg. But it was higher than the 2.6 per cent rate in October, which itself marked an increase on the previous month.
Market pricing indicated that investors now assign a 98 per cent probability to a quarter-point rate cut in December, up from less than 90 per cent before the release of the latest inflation figures.
Brian Levitt, global market strategist at Invesco, said the figures were “very much within the Fed’s comfort zone and support[ed] a rate cut at the next meeting”.
A quarter-point cut next week would take interest rates to a new target range of 4.25-4.5 per cent.
The trajectory next year is less certain, as the central bank wrestles with its dual mandate to keep inflation close to 2 per cent and maintain a healthy labour market.
In a reference to President-elect Donald Trump, who takes over from President Joe Biden in January, David Kelly, chief global strategist at JPMorgan Asset Management, said: “If the Fed didn’t cut next week . . . I think you’d get a Tweet coming out saying ‘Why are they not cutting? They cut for the former guy’.”
But Kelly said a cut in January was unlikely and that the Fed now had the “opportunity of quietly laying out a more moderate path of rate cuts in 2025”.
US stocks rose sharply, with the benchmark S&P 500 adding 0.7 per cent and the tech-heavy Nasdaq Composite jumping 1.3 per cent.
In government bond markets, the policy-sensitive two-year Treasury yield, which moves inversely to price, was 0.03 percentage points lower at 4.12 per cent.
The dollar slightly trimmed an earlier gain to trade 0.1 per cent higher against a basket of six other currencies.
Wednesday’s data showed that on a monthly basis, both headline and core inflation — which strips out food and energy prices — rose 0.3 per cent in November.
On an annual basis, core inflation rose 3.3 per cent.
Most of the month-on-month increase in prices was due to a 0.3 per cent increase in the shelter index, which tracks housing-related costs. But other indicators suggest such costs have fallen, since the shelter index lags behind other data by nine months to a year.
Once housing, food and energy prices were excluded, services inflation rose 0.19 per cent for the month, down from 0.3 per cent in October.
Fed officials have discussed slowing the pace of cuts as rates reach a more “neutral” setting that is high enough to keep inflation in check but sufficiently low to safeguard the labour market.
They argue that if they cut rates too quickly, inflation may get stuck above their 2 per cent target, but moving too slowly could risk a sharp rise in the unemployment rate.
Last week, chair Jay Powell suggested that a strong economy meant the central bank could “afford to be a little more cautious” about rate reductions.
Some officials in the outgoing Biden administration have expressed concern that Trump’s policies will damage the economy after he returns to the White House next month.
US Treasury secretary Janet Yellen said this week that the sweeping tariffs proposed by Trump could “derail” progress on taming inflation.
“[Tariffs] would have an adverse impact on the competitiveness of some sectors of the United States economy, and could significantly raise costs to households,” she said at an event hosted by the Wall Street Journal.
Kelly argued that a Fed signal next week that it was slowing down the pace of rate cuts could defer if not eliminate the risk of an eventual clash with Trump.
“Some day, something’s going to go wrong in the economy and the markets, and the Fed’s going to get blamed and that’s going to cause a confrontation — that’s almost inevitable,” he said. “But it’s going to be unpleasant when it occurs, so I think the Fed would like to delay it as much as possible.”
