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U.S. Annual Inflation Accelerates to 2.7% in November, Strengthening Rate Cut Expectations

US annual inflation accelerated to 2.7% in November, based on the latest available figures from the Bureau of Labor Statistics. It thus accelerated 0.1 percentage points in October, when the consumer price index was 0.3% higher from a month earlier. Core CPI, which does not include volatile food and energy prices, rose to 3.3% on an annual basis from last month, when it had remained unchanged at that level. Monthly, the core CPI also rose 0.3% as projected. 

The numbers coincide with Federal Reserve officials planning their summit. The markets have recently shifted to believe there’s a great chance the Fed funds rate will be trimmed by one-fourth of a percentage point in the December 18 policy session, with FedWatch reports from the CME Group showing traders raise the possibility to 99%. This is the shift in expectations after the past months of rate hikes designed to tame inflation. The market also slightly prices in the possibility of a rate cut in January, with odds now at about 23%. 

Although inflation has eased off its peak in mid-2022, it remains above the Fed’s target of 2% annually. A few policymakers have expressed some concern that inflation is lingering too long, especially on housing and wages. If inflation does not abate more quickly, they think the pace of rate cuts should slow. 

Shelter costs led the increase in the November CPI and were a very significant part of the same. The increase was by 0.3% and was the main contributory factor to the persistent inflation seen in housing components, accounting for around 40% of the total rise in CPI in November. Economists believe that shelter cost will now moderate since new rentals are entered into and, thus, still increases each month. The price of used vehicles continued to increase by 2% month-over-month and new vehicle prices increased 0.6%, but this time reversing the pattern seen in the last several months. 

Food prices also increased 0.4% for the month and 2.4% year-over-year. The biggest decline was seen in cereals and bakery products, which fell 1.1%, the largest monthly decline since 1989. Energy prices rose 0.2% for the month but decreased 3.2% from last year. 

In terms of wages, average hourly earnings have been basically flat on a nominal basis but have increased 1.3 percent compared with the same period last year when adjusted for inflation. As the Fed gets set to make its decision, the data speaks to some of the persistent problems that exist in the U.S. economy even as inflation continues to gradually decline.