US core inflation increased last month. This supports the argument of the US Federal Reserve, that interest rates could need to be held for several months.
The US core price index rose by 0.3 percent in November. However, the core rate for the entire year remained at 4 percent.
The annual core measure is a good indicator of long-term inflation. It strips out the price changes for energy and food.
The headline rate fell to 3.1 percent, which was in line with the expectations and slightly below October’s rate of 3.2 percent.
Investors reduced their expectations of interest rate reductions after the publication of data.
Omair Sharif is the president of Inflation Insights, a forecasting group. “The Fed tells us that they are not confident that they will be able to say with certainty when inflation will reach [its target of] 2% anytime soon,” he said. “I don’t think confidence can be present after today’s figures.”
He also said that the numbers did not indicate “a complete clear”.
Analysts interpreted the core inflation figures as a sign of a bumpy road to bring the figure down in the next year.
After the release of the data, traders reduced their expectations. The market is still expecting a quarter point cut in interest rates for next May.
Fed officials will vote on Wednesday for to maintain the current range of interest rates , which is 5.25 to 5.5 percent.
The S&P 500 index closed higher by 0.5 percent, reaching its highest level since January 2022. This leaves it approximately 3 per cent lower than its previous record high.
The US Government Bond Market appeared calm. Yields on shorter-dated Treasury Notes were about flat for the day while those on longer dated instruments were slightly higher.
Janet Yellen said that the figures released on Tuesday confirmed a “meaningful” drop in inflation. President Joe Biden stressed that despite the decline in the consumer price Index, unemployment remained under 4 percent.
He said that, after inflation was taken into account, “the wages of workers and the household wealth is higher than it was before the pandemic.”
The Fed prefers to use a less volatile indicator — the index of core personal consumption expenditures.
The Fed’s Jay Powell will likely be influenced by Tuesday’s numbers, which were released more than a week before the PCE report, in terms of his willingness to contradict market expectations for a rate cut.
On Wednesday, the central bank will publish its latest summary economic projections. This will be closely watched for any indications of how many reductions officials anticipate next year.
The Fed wants to confirm that the inflation rate in the service sector has moderated. Sharif, however, said that prices in the service sector increased by 0.44 percent when housing and energy were taken out.
The figures released on Tuesday also showed that housing costs, measured by the amount homeowners think their property would rent for in a month, increased 0.5%. The rise in housing costs partially offset the fall in prices for energy and other items.
Rubeela Farrooqi is the chief US economist of High Frequency Economics. She said that policymakers will likely retain a hawkish stance, given that prices are rising at an uncomfortably rapid pace. Fed officials also pay attention to potential inflation risks.
The strong US job data released last week has led some investors revise expectations for a rate cut beginning in March.
Alan Detmeister said that the data “consistently reflected a general slowing of inflation”.
He said it is still possible that the central bank will cut rates in March, to make sure interest rates do not become restrictive for businesses and households once inflation moves closer to the target.
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