In November, US consumer prices increased by 0.3%, marking the largest monthly gain in seven months, according to the Labor Department’s Bureau of Labor Statistics. This is a notable jump from the steady 0.2% increases seen over the previous four months. The consumer price index (CPI) has now risen by 2.7% compared to the same period last year, up from 2.6% in October. While economists had predicted a 0.3% rise and a 2.7% annual increase, the data signals a continued, albeit gradual, recovery from the inflationary surge seen last year.

Inflation Slows But Still Above Target

Inflation has decelerated significantly since peaking at 9.1% in June 2022. Despite the slowing growth, the US Federal Reserve’s target inflation rate of 2% remains elusive. November’s CPI data indicates that the reduction in inflation has nearly stalled, causing some concern regarding the central bank’s ability to meet its inflation targets in the short term.

Labor Market Softening and Its Impact on Fed Decisions

The US labour market has shown signs of cooling, with the unemployment rate inching up to 4.2% in November after holding steady at 4.1% for two consecutive months. However, job growth has rebounded from previous slowdowns caused by strikes and hurricanes in October. Despite these mixed signals, the Federal Reserve remains focused on the labour market rather than inflation alone.

Financial markets are predicting a strong likelihood of a 25 basis point rate cut during the Federal Reserve’s policy meeting on December 17-18, with the probability sitting at 86%, according to the CME Group’s FedWatch Tool. This marks the third rate cut in recent months, as the Fed continues its policy of easing rates in response to slower inflation and a softening labour market.

Lower Inflation and Policy Uncertainty Ahead

While inflation is expected to slow further in 2025 due to moderating rents and increased labour market slack, other factors, such as tariffs and the immigration policies promised by President-elect Donald Trump, may create upward pressure on prices. According to Stephen Juneau, an economist at Bank of America Securities, these political and policy factors could offset the disinflationary trend, preventing a significant reduction in inflation in the coming year.

Core CPI and Fed’s Easing Cycle

Excluding the volatile food and energy sectors, the core CPI increased by 0.3% in November, maintaining a consistent pace from the previous months. The core CPI, which measures underlying inflation trends, rose 3.3% year-over-year in November, unchanged from October’s figure.

The Federal Reserve’s current monetary policy includes easing the benchmark interest rate, which now stands at 4.50%-4.75%. After aggressively raising rates between March 2022 and July 2023 to curb inflation, the Fed is now in a phase of rate cuts, aiming to balance inflation control with economic stability.

Despite the November uptick in inflation, fewer rate cuts are expected for 2025 compared to earlier projections. The Fed’s focus remains on managing the labour market and balancing inflationary pressures, though uncertainty regarding fiscal policies and potential tariff increases may influence future decisions.

Overall, while inflation continues to slow, the Federal Reserve’s decisions next week are expected to reflect a cautious approach, ensuring that the US economy remains on track amid cooling inflation and a changing labour market landscape.

(With Reuters inputs)