In November, economists anticipate a decrease in headline inflation due to further declines in gasoline prices. Meanwhile, core inflation, which excludes food and energy prices, is expected to remain steady. This mirrors the previous month’s trend when energy prices saw a 2.5% drop, primarily driven by a 5% decrease in gasoline prices.
The upcoming release of CPI data by the government on Tuesday at 8:30 a.m. Eastern will provide a clearer picture. According to economists surveyed by the Wall Street Journal, headline inflation is predicted to remain unchanged in November, continuing the stall witnessed in the prior month. Consequently, headline inflation is anticipated to decrease from 3.2% to 3%.
This flat reading is considered favorable by experts. Scott Anderson, the Chief U.S. Economist at BMO Capital Markets, described it as “Fed-friendly.” The Federal Reserve officials will receive this data at the beginning of their two-day policy meeting where they are expected to slightly push back against market expectations of rapid rate cuts in the coming year.
On the other hand, economists forecast that core inflation will remain high at a 4% year-on-year basis in November. They anticipate a 0.3% rise in core inflation during the month, following a 0.2% increase in October.
However, there is positive news regarding core inflation. If economists’ predictions hold true, core inflation over the past six months would have an annual rate of 2.8%. Notably, this would be the first time core inflation has fallen below 3% since March of 2021, as noted by economists from Deutsche Bank.
To gain further insight into when overall core inflation will decline, economists will closely monitor core services excluding housing, according to Anderson.
Inflation and the Last Mile Dilemma
October witnessed a slight increase of 0.2% in core services ex-housing, while the 12-month change stood at 3.8%. However, economists are engaged in an ongoing debate about whether inflation will prove to be more stubborn over what they refer to as the “last mile.” Initially, many analysts believed that core inflation would gradually decrease and settle within the 3-4% range. However, they also expressed concerns that achieving the desired 2% target might present further challenges.
Despite these apprehensions, some economists are starting to question whether the worry about the last mile is exaggerated. Gregory Daco, EY chief economist, expressed his confidence in a note to clients, stating, “Ain’t no reason to believe the last inflation mile will be the most difficult.”
On a similar note, Tim Duy, chief U.S. economist at SGH Macro Advisors, claims that the notion of the hard last mile being a mid-2023 idea is already outdated.
Contradicting this optimism, Avery Shenfeld, chief economist at CIBC Capital Markets, believes that wage inflation is still too rapid. According to Shenfeld, the United States needs to witness a slower pace of growth in order to bring inflation back down to the targeted 2%. Furthermore, he highlights early signs of a sputtering engine in the U.S., particularly in interest-sensitive activity. Shenfeld argues that these signs should be enough for the Federal Reserve to avoid raising rates any further. Notably, bank lending to businesses has seen a decline for six consecutive months.
Meanwhile, on Monday, the 10-year Treasury yield (BX:TMUBMUSD10Y) increased to 4.28%, up from last week’s rate of 4.11%.
In conclusion, economists remain divided on whether the last mile of inflation will be as challenging as anticipated. While some experts maintain a positive outlook, others urge caution, emphasizing the need for slower growth and the potential consequences of wage inflation. With interest-sensitive activity showing signs of weakness, the Federal Reserve’s course of action regarding future rate hikes is being closely scrutinized.