November’s CPI to show market cool down but inflation to remain high

Analysts have predicted that consumer inflation likely cooled down in November compared to October this year but remained at a high rate, especially in the service sector.

According to Dow Jones analysts, the November consumer price index (CPI) might see a 7.3 percent year-over-year increase. Last October, the year-over-year rate was 7.7 percent. The core CPI — which measures consumer prices and energy and food costs — was expected to rise by 0.3 percent or increase by 6.1 percent over 12 months. The previous month, the year-over-year core CPI was 6.3 percent.

Bank of America Merrill Lynch chief U.S. rate strategist Mark Cabana said the consumer prices would affect the financial market substantially. If investors see signs of cooling inflation in the data, the financial market may start an upside trend. On the other hand, if the CPI shows a higher inflation rate, the response will be “sizeable.”

The Federal Reserve uses consumer data as a basis for developing its monetary policy, along with other data such as employment reports. The public expects the central bank to reduce the rate hike size on Wednesday by 50 basis points instead of 75 basis points in the last four rate-setting meetings.

According to experts, the hike size will remain at that rate regardless of the CPI data released prior to the December FOMC meeting. However, a higher-than-expected CPI may lead the Fed to maintain a high benchmark interest rate for a longer term.

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Most economists agree that the Fed funds target rate will reach five percent or slightly more by the end of this monetary tightening cycle. At the moment, the rate ranges from 3.75 to 4.0 percent.

After each rate-setting meeting, Fed chairman Jerome Powell usually makes a public announcement regarding the decisions made at the meeting. Since this meeting is the last FOMC meeting in 2022, the Fed will also announce its quarterly forecasts.

Jefferies chief financial economist Aneta Markowska said that the Fed’s report and November’s CPI would not harm the market, adding that she was “pretty neutral” about the report. She explained that Powell had told the public that the core goods prices would slow down last week.

“It feels like that risks are asymmetrically skewed toward the high side,” Markowska said. “I think if you get a higher print, I think the [stock] sell-off is disproportionately stronger.”

"We are in phase one of the inflation slowdown, driven by goods and food and energy and that is great."

Aneta Markowska, chief financial economist at Jefferies

However, Markowska also said investors needed more confidence that the inflation core services and the real estate market had slowed down. According to her, investors should pay attention to the components of the CPI reading. The report includes sectors driven by wage inflation, such as medical services, transportation and recreation.

KPMG head economist Diane Swonk shares Markowska’s opinion, stressing the importance of understanding which sector inflation is present.

“We’re going to look at the things that are most dependent on wages,” Swonk said. “It means looking at everything from restaurant costs, hospitality to hotel rooms, haircuts and personal care.”

Swonk added that the Fed’s quarterly forecasts would likely not include findings from November’s CPI. However, the data will still affect other communication from the central bank.

Stock market rallies on Monday

Ahead of the CPI publication, major indices rallied on Wall Street. The S&P 500 rose by 1.43 percent, the Dow Jones gained 1.58 percent and the NASDAQ saw a 1.26 percent raise on Monday. Bond yields moved in the opposite direction, with the two-year note yield often linked to the Fed’s policy rising to 4.39 percent.

Market analysts, however, warned that investors needed to wait for the CPI before getting complacent about the rally because the data would determine a longer-term market movement.