CPI Does Little to Change Rate Expectations Ahead of FOMC Day

Rates steady after CPI largely meets expectations. Market participants have shifted focus towards tomorrow’s Fed press conference (to follow the FOMC decision), as CPI provided little clarity on the Fed’s path forward. Rate cut bets dropped immaterially following the data, and a pause remains “locked” in for the next two meetings. Elsewhere, equities had a positive day as the NASDAQ, DJIA, and S&P500 rose 0.4% – 0.7%. The “fear gauge” VIX dropped to its lowest level since 2019, now just above 12.

Core CPI accelerated MoM, but inflation is still broadly on a downward path. November’s elevated MoM core CPI results were driven by persistent service-sector inflation (+0.4% MoM) and higher shelter costs, which constitute 1/3rd of the overall index. Though elevated this month, inflation remains on a downward trajectory. Core YoY CPI is down from 5.6% in January to 4.0% and hasn’t risen above 4.5% since July. Another measure cited by Fed officials and Powell, 6-month annualized inflation fell below 3% for the first time since early 2021.

Producer Price Index forecasts call for a MoM spike and a YoY decline. Tomorrow’s PPI data is expected to produce mixed results. MoM prints are expected to rise precipitously from October, including a 0.2% rise in core PPI and 0.5% spike in headline PPI. However, YoY data should fall from last month, with core expected to decline 0.2%. As is the case with CPI, MoM PPI has overall been on a downward trend since the beginning of the year, which could quell concerns over this month’s potential rise. After all, Powell has warned the process would be “bumpy”, requiring the Fed to be patient in their approach.