Wednesday's CPI report is expected to show that progress on inflation has hit a wall

A major economic report next Wednesday is expected to show that progress in reducing inflation has stalled, but not so much that the Federal Reserve won't cut rates next week.

The Consumer Price Index, a broad measure of the cost of goods and services in the U.S. economy, is expected to post annual inflation of 2.7% in November, which would represent an acceleration of 0.1 percentage point from the previous month , according to the Dow Jones. Jones consensus.

Excluding food and energy, so-called core inflation is expected at 3.3%, unchanged from October. Both measures are expected to show a monthly increase of 0.3%.

With the Fed targeting 2% annual inflation, the report will provide more evidence that the high cost of living for American households remains a reality.

“When you look at these measures, there is nothing to indicate that the inflation dragon has been slain,” said Dan North, senior economist at Allianz Trade Americas. “Inflation is still there and showing no convincing moves towards 2%.”

In conjunction with Wednesday's consumer price release, the Bureau of Labor Statistics will release its Producer Price Index on Thursday, a measure of wholesale prices that is expected to show a monthly gain of 0.2%.

To be fair, inflation has fallen significantly from the CPI cycle peak of around 9% in June 2022. However, the cumulative effect of price increases has been a burden on consumers, especially those at the lower end of the wage scale. The core CPI has risen since July, following a steady series of declines.

Still, futures market traders say there is a good chance that policymakers will cut short-term interest rates again by a quarter of a percentage point when the Federal Open Market Committee concludes its meeting on December 18. The chance of a reduction was almost 88% on Tuesday morning. , according to CME Group's FedWatch measure.

“When the market is as stuck as it is now, the Fed doesn't want to pull off a big surprise,” North said. “So unless something shoots up that we didn't anticipate, I'm pretty sure the Fed is on lockdown here.”

The CPI increase for November likely came from a few key areas, according to Goldman Sachs.

Car prices are expected to rise 2% monthly, while airfares are seen as 1% higher, the company's economists forecast in a note. Moreover, the alarming rise in auto insurance is likely to continue, rising 0.5% in November after rising 14% over the past year, Goldman estimates.

While the company sees “further disinflation in the pipeline over the next year” due to a loosening in auto and home rental categories, as well as a weakening in the labor market, it is also concerned that President-elect Donald Trump's planned tariffs keep inflation high in the coming years. 2025.

Goldman predicts that core CPI inflation will soften, but only to 2.7% next year, while the Fed's inflation target, the price index for personal consumption expenditures, will rise to 2.4% from the most recent level of 2.8%.

With inflation expected to be well above 2% and macroeconomic growth still around 3%, this would not normally be an environment in which the Fed would be cutting back. The Fed uses higher interest rates to curb demand, which in theory would force companies to lower prices.

Markets expect to skip the January meeting and possibly cut again in March. From that moment on, the market price will only be subject to one or a maximum of two cuts for the remainder of 2025.

“For me, two percent does not mean that we have to reach 2% and go further. It means we need to get to 2% on an ongoing basis, for the foreseeable future, and none of that is reflected in these reports,” North said. “You don't really want to cut corners in that environment.”