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Consumer inflation should have continued to slow in November but remain elevated

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A person walks past the meal aisle inside a grocery store on November 14, 2022 in New York City.

Spencer Platt | Getty Images

Consumer inflation probably slowed in November, but prices continued to rise at a still high pace, especially for services.

Economists expect the consumer price index to rise 0.3% in November, an annual rate of 7.3%, according to Dow Jones. That’s down from 7.7% in October. Excluding food and energy, core CPI is expected to rise 0.3%, or 6.1% year-over-year, compared to the 0.3% gain in October, or an annual rate of 6.3%, according to Dow Jones.

The inflation report is due Tuesday at 8:30 a.m. ET, as the Federal Reserve begins its two-day meeting. The central bank is expected to raise rates by half a percentage point on Wednesday afternoon, and economists mostly expect the Fed to stick to the 50 basis point increase even if the report on the CPI is warmer. One basis point is equal to 0.01 percentage point.

“I think if the market sees something online, it’s fine,” said Mark Cabana, head of US rates strategy at Bank of America Merrill Lynch. “If the theme holds, rates [bond yields] probably still decline a bit. But if we see something that surprises on the upside, I think that would generate a larger market response, because it would challenge the theme that the market has really been hanging on to, which is that inflation has reached its maximum.”

Economists expect the Fed to continue raising interest rates until the target federal funds rate hits 5% or slightly higher. The federal funds target range is currently 3.75% to 4%. A warmer or lower CPI report is unlikely to sway the Fed for this meeting, but economists say it could be a signal on the longer-term path of interest rates.

Stocks were higher on Monday and Treasury yields were also higher ahead of Tuesday’s CPI report. Bond yields move opposite to prices. The yield on 2-year notes, which best reflects Fed policy, jumped to 4.39% on Monday, up 0.06 percentage points.

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Fed Chairman Jerome Powell holds his regular post-meeting press conference Wednesday at 2:30 p.m. ET, half an hour after the Fed released its policy statement and latest economic and interest rate outlook .

“I think it will be another benign impression. I’m pretty neutral on this report,” said Aneta Markowska, chief financial economist at Jefferies. “It looks like the risks are asymmetrically biased upwards. I think if you get a higher impression, I think the [stock] the sale is disproportionately stronger.”

Markets will be largely focused on inflation coming from services, excluding real estate, as Powell pointed out recently.

“Powell told us just about last week that we know that basic goods will continue to slow. We know that housing will eventually slow as the drop in market rents eventually materializes. The one piece we don’t trust the downturn is ex-housing basic services,” Markowska said.

The Jefferies economist said this component of the inflation report is critical because it includes areas that are driven by wage inflation, such as transportation, medical services, education and recreation. She said core goods inflation is expected to slow and some of the services price inflation will show signs of slowing. Hotel rates are one area where inflation could ease, and economists expect pandemic-related price increases to continue to dissipate, including in used autos.

“We know the inflation data will be better. It will be fresher. That’s great, but it’s going to take a lot of detail to see where there is inflation and where there isn’t. “said Diane Swonk. , chief economist at KPMG. Swonk said the data likely won’t be reflected in the Fed’s quarterly forecast, due Wednesday afternoon. But a warmer or weaker number could still influence other Fed communications.

“They’ll already have it separated by the time they meet. They’ll discuss it,” Swonk said. “That might nuance the tenor, the nuance with which Powell delivers his press conference.”

Swonk said the data could continue to be noisy and inconclusive on the direction of inflation.

“Unfortunately it will be less definitive than we would like because we know it contains distortions,” she said. “The more important question is whether there is something going on in this unsheltered service component that is more systemic than the Fed envisions.”

Swonk said it will be important to see if there is significant downward movement or if inflation plateaus, which would also be positive against rising prices.

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

Sectors where there has been the most inflation, such as energy, should continue to cool. Energy rose 1.8% in October.

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