Aligned with expectations, US inflation reading bolsters odds for December rate cut

By Tuba Ongun

With US inflation figures meeting market expectations, prospects for a 25-basis-point rate cut appear stronger than ever at the Federal Reserve's next meeting.

Headline annual inflation ticked up to 2.7% in November from October’s 2.6%, while core inflation, which excludes volatile food and energy prices, remained steady at 3.3%. On a monthly basis, both headline and core inflation came in at 0.3%, aligning with forecasts.

Speaking to Anadolu, Ryan Sweet, chief US economist at financial consultancy firm Oxford Economics, underlined the resilience of consumers despite ongoing inflationary pressures, particularly in discretionary spending categories like motor vehicles, hotel lodging, and airfares.

Inflation in stickier components, like shelter, however, showed signs of easing, reinforcing a continued disinflationary trend, he highlighted.

"There are numerous reasons why inflation is unlikely to rear its ugly head again, even though there are concerns of another wave," he said.

Sweet, who noted that the Fed is projected to cut interest rates in December, anticipates a more measured approach in the new year.

"We remain comfortable with our forecast for the Federal Reserve to cut interest rates in December and then pause in January," he said.

Sweet noted that the central bank may face challenges, including seasonal inflation spikes and potential tariff-related pressures, but he still expects three 25-basis-point rate cuts next year.

- Disinflationary trends persist despite risks

Padhraic Garvey, head of research for the Americas region at ING, highlighted that inflation in November showed signs of easing in key areas like housing and education, though vehicle prices continued to rise.

He stressed that with the producer price index projected to rise by 0.2%, the core personal consumption expenditures deflator — a key Fed inflation measure — is expected to show a similar 0.2% month-over-month increase next week.

Like others, Garvey anticipates a December rate cut but believes the Fed will signal a slower pace for 2025. "Given this backdrop, we still expect a 25-basis-point cut from the Fed next week.

"But, their forecast update will likely signal just three rate cuts in 2025 versus the four they projected in September," he explained.

Max Gillman, a professor of economic history at the University of Missouri, pointed to the Fed's current historically high interest rate on reserve balances when adjusted for inflation.

Gillman also expects the Fed to reduce rates by 25 points in its December meeting, aligning with positive market reactions to November’s inflation data. While another rate cut seems likely, it remains uncertain as the Fed balances economic trends, he stated.

- Persistent inflation still a concern

However, not all economists were as optimistic about the disinflationary progress.

Steven Kamin, senior fellow at the American Enterprise Institute (AEI), raised concerns about persistent inflation.

"Even though the latest CPI data were consistent with expectations, I find the lack of progress toward disinflation disappointing," he said.

Noting that core inflation remains stuck at 3.3%, well above the Fed’s 2% target, Kamin said the persistent core inflation is worrisome and could be attributed to strong wage growth, which averaged 4.5% annually in November.

"While I expect the Fed to cut rates another 0.25 percentage point next week, my preference would be for them to keep rates unchanged," he noted.

Satyam Panday, chief US economist at S&P Global Ratings, cautioned against complacency in the fight against inflation.

The Fed’s December cut is likely, but progress on inflation has slowed, particularly with services inflation proving sticky and core goods inflation fading, Panday said.

"Our sense is that inflation numbers (together with employment report last week) won’t persuade the Fed to skip another 25bp rate cut at next week’s FOMC meeting," Panday noted. The Federal Open Market Committee (FOMC) is the Fed's main decision-making body on interest rate decisions.

He expects the central bank to pause rate cuts after December, adding that 2025 could see a much more cautious Fed, with rate cuts proceeding at a slower pace. "A pause after December cut to reassess is likely in the cards."