Rise in US core inflation highlights stubborn price pressures

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US core inflation rose last month, bolstering arguments by the US Federal Reserve that interest rates may need to remain on hold for months to come.

Figures published on Tuesday, a day before the Fed is expected to vote on borrowing costs, showed US core prices rose 0.3 per cent during November, while the year-on-year core rate remained flat at 4 per cent.

The annual core measure, seen as a bellwether for longer-term inflation, strips out changes in the prices of energy and food.

The headline rate edged lower to 3.1 per cent, in line with expectations and marginally below October’s 3.2 per cent rate.

After the data’s publication, investors scaled back their expectations for interest rate cuts.

“The Fed keeps telling us they don’t have confidence that they can say with certainty that inflation is going to [its target of] 2 per cent anytime soon,” said Omair Sharif, president of forecasting group Inflation Insights. “I don’t think that confidence can be there after today’s numbers.”

He added that the figures did not signal “an all clear”.

Analysts took the core inflation data as a sign that the path to bringing the figure down next year will be a bumpy one.

While the market still anticipates a quarter-point cut in interest rates by next May, traders trimmed their expectations after the data release.

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

US stocks ended 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 from earlier that month.

The US government bond market appeared calm, with yields on shorter-dated Treasury notes about flat on the day, while those on longer-dated instruments were slightly lower.

Janet Yellen, US Treasury secretary, said Tuesday’s figures confirmed inflation was coming down “meaningfully”, while President Joe Biden emphasised that, despite the fall in the consumer price index, unemployment remained below 4 per cent.

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

The Fed prefers a less volatile metric — the core personal consumption expenditures index.

But Tuesday’s figures, which came more than a fortnight ahead of the PCE data, are likely to influence how willing Fed chair Jay Powell is to push back on markets’ rate cut expectations.

The central bank will on Wednesday publish its latest summary of economic projections, which will be watched closely for signals on how many cuts officials foresee next year.

The Fed is seeking confirmation that inflation in the services sector is moderating. But Sharif said prices across the services sector rose 0.44 per cent in November once housing, energy and food were factored out.

Tuesday’s figures also indicated housing-related costs, as measured by how much homeowners believe their properties would rent for, rose 0.5 per cent during the month. This partially offset falls in energy prices and other everyday items.

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

Strong US jobs data published last week led some investors to revise their expectations of a round of rate cuts beginning in March.

But Alan Detmeister, a former Fed economist now at UBS, said the latest data was “consistent with generally slowing inflation”.

He added it was still possible the central bank would cut rates in March to ensure interest rates did not become too restrictive for households and businesses once inflation moved closer to target.

Additional reporting by Nicholas Megaw in New York