Rising core inflation in the US highlights stubborn price pressures

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Core inflation in the United States rose last month, strengthening the US Federal Reserve’s arguments that interest rates may need to remain unchanged for months to come.

The figures published on Tuesday, a day before the Fed is expected to vote on borrowing costs, showed that US core rates rose 0.3 percent during November, while the year-on-year base rate remained steady at 4 percent.

This annual core measure, which is seen as an indicator of long-term inflation, excludes changes in energy and food prices.

The headline rate fell to 3.1 percent, in line with expectations and marginally lower than the October rate of 3.2 percent.

After the data was published, investors lowered their expectations for a cut in interest rates.

“The Fed keeps telling us that they don’t have confidence in their ability to say with certainty that inflation will continue [its target of] Omair Sharif, head of forecasting group Influence Insights, said that inflation will rise to 2% any time soon. “I don’t think the confidence can be there after today’s numbers.”

He added that the numbers do not indicate “the all-clear.”

Analysts took the core inflation data as a signal that the road to lowering the number next year will be bumpy.

While the market still expects interest rates to be cut by a quarter point by next May, traders reduced their expectations after the data was released.

Fed officials are expected to vote on Wednesday to keep interest rates at their current range of 5.25% to 5.5%.

US stocks closed higher, with the S&P 500 rising 0.5 per cent to its highest closing level since January 2022. That leaves it about 3 per cent below its record high earlier that month.

The US government bond market appeared calm, with yields on short-term Treasuries stable during the day, while yields on longer-term instruments were slightly lower.

US Treasury Secretary Janet Yellen said that Tuesday’s numbers confirm a “significant” decline in inflation, while President Joe Biden confirmed that despite the decline in the consumer price index, unemployment remained below 4 percent.

“Worker wages and household wealth are higher now than before the pandemic, adjusted for inflation,” he said.

The Fed prefers a less volatile measure – the core personal consumption expenditures index.

But Tuesday’s numbers, which came more than two weeks before personal consumption expenditures data, are likely to influence the extent to which Fed Chairman Jay Powell is willing to back down on interest rate cut expectations in markets.

On Wednesday, the central bank will publish its latest summary of economic forecasts, which will be closely watched for signs of how many cuts officials expect next year.

The Fed is seeking confirmation that service sector inflation is moderating. But Sherif said that prices in the services sector rose 0.44 percent in November after excluding housing, energy and food.

Tuesday’s figures also indicate that housing-related costs, measured by how much homeowners think their properties will rent for, rose 0.5 percent during the month. This is partially offset by lower prices for energy and other everyday items.

“Policymakers are likely to maintain a hawkish bias as prices continue to rise at an uncomfortably fast pace, and Fed officials are sensitive to upside risks to inflation,” said Rubeela Faruqui, chief US economist at consultancy High Frequency Economics.

Strong US jobs data published last week prompted some investors to revise their expectations for a round of interest rate cuts starting in March.

But Alan Dittmeister, a former Fed economist who now works at UBS, said the latest data is “consistent with a slowdown in inflation overall.”

He added that it is still possible that the central bank will cut interest rates in March to ensure that interest rates do not become too restrictive for households and businesses once inflation approaches the target.

Additional reporting by Nicholas Megaw in New York