Inflation Hits 7-Month High in November: Fed Eyes Third Interest Rate Cut Amid Cooling Labor Market and Economic Policy Shifts

Inflation Rebound in November Unlikely to Stop Fed Rate Cuts

November saw U.S. consumer prices rise at their fastest pace in seven months, but experts believe the Federal Reserve remains on track to lower interest rates for a third time next week. This decision comes amid signs of a cooling labor market, reflecting the Fed’s focus on broader economic conditions.

The Bureau of Labor Statistics reported a 0.3% increase in the consumer price index (CPI) for November, ending a streak of four months with 0.2% gains. Annually, the CPI climbed 2.7%, edging higher from October’s 2.6%. These figures matched economists’ forecasts, based on a Reuters poll.

Inflationary Trends and Challenges

While inflation has significantly declined from its peak of 9.1% in June 2022, the journey toward the Federal Reserve’s 2% target appears to have stalled. Despite this, the Fed is prioritizing labor market conditions over inflation at this stage.

Job creation rebounded in November after being hampered by natural disasters and labor strikes in October. However, the unemployment rate increased slightly to 4.2% from 4.1%, breaking a two-month hold. Market confidence in a 25-basis-point rate cut at the December 17-18 Federal Reserve meeting remains high, with CME Group’s FedWatch Tool showing an 86% probability.

Shifting Expectations for 2024

Expectations for interest rate reductions in 2024 have diminished compared to earlier projections. Analysts anticipate slower inflation next year due to softening rent growth and greater labor market flexibility. However, potential inflationary pressures could arise from tariffs and immigration policies set to take effect under President-elect Donald Trump’s administration.

“From our perspective, inflation risks are limited,” said Stephen Juneau, an economist at Bank of America Securities. “That said, changes in tariffs and immigration policies may slow progress on inflation reduction in the coming year.”

Core CPI and Federal Reserve Policies

The core CPI, which excludes food and energy costs, rose 0.3% in November, matching the monthly growth rate observed since August. On an annual basis, core CPI maintained its 3.3% increase from October.

Since initiating its monetary easing policy in September, the Federal Reserve has reduced its benchmark interest rate to the 4.50%-4.75% range. This follows a series of aggressive hikes that raised rates by 5.25 percentage points between March 2022 and July 2023 to combat inflation. As inflation slows, the Fed is balancing its approach to sustain labor market stability and promote economic growth.

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