On December 11, the U.SConsumer Price Index (CPI) for November was released, showing inflation figures that met expectationsThis development has intensified traders' predictions that the Federal Reserve (Fed) will cut interest rates by 25 basis points at their upcoming meetingConcurrently, there has been a slight uptick in wagering that a further rate cut could occur in JanuaryThe CPI numbers indicated a month-over-month increase of 0.3% and a year-over-year rise of 2.7%, both reflecting a 0.1 percentage point acceleration compared to the previous monthNotably, this represents the first back-to-back monthly year-on-year growth in nominal CPI since March of this yearThe core CPI, which excludes the more volatile food and energy sectors, also saw a month-on-month increase of 0.3%, maintaining the same growth rate for the fourth consecutive month, with a year-on-year increase holding steady at 3.3%.

However, analysts were quick to highlight that while the CPI data met expectations, it simultaneously illustrated a plateau in the recent trend of cooling inflation

The core CPI has remained stagnant at a relatively high 3.3% for the past three months, which is significantly above the Fed’s target of 2%, as measured by the Personal Consumption Expenditures (PCE) price index, which is a preferred inflation gauge for the central bankFollowing the CPI announcement, the FedWatch tool, a statistical model of futures markets compiled by the Chicago Mercantile Exchange (CME), indicated a soaring likelihood of a 25 basis point rate cut—as high as 95%, in contrast to just 89% the day before.

The immediate market reaction was telling; U.STreasury yields saw a sharp decline as traders adjusted their expectations about future Fed actionsNonetheless, the sentiment surrounding the likelihood of additional rate cuts in January appeared less optimistic, with bets rising only marginally from 19% to 22%.

Vital Knowledge’s analyst, Adam Crisafulli, referred to this CPI data as perhaps the most crucial economic release of the year, deeming the prospect of a rate cut next week "inevitable." Yet, he also expressed uncertainty about the trajectory thereafter, predicting possible "mild hawkishness" in the Fed’s forthcoming guidance which could mean a pause in rate changes at the January 2025 meeting and perhaps even in March.

Similarly, Whitney Watson, Co-Head of Global Fixed Income at Goldman Sachs Asset Management, suggested that the core CPI numbers validate the path toward a December rate cut, noting that the figures had not surprised markets in a concerning manner

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This lack of volatility may reinforce the Fed officials' confidence in the inflation reduction trend as they approach the New Year, likely leading a gradual easing of monetary policies into 2024.

LPL Financial's Jeffrey Roach added that wage growth continues to outpace inflation, positioning U.Sconsumers favorably as they head into the new yearWith seemingly stubborn components of inflation starting to stabilize, it is anticipated that the Fed may progressively and surely continue to lower interest rates.

Both David Russell, the Chief Market Strategist at TradeStation, and Tom Hainlin, Senior Investment Strategist at U.SBank Asset Management, concurred that while inflation seems to have ceased its decline, there remains insufficient impetus to unwind the ongoing bull market in U.SequitiesRussell highlighted that concerns surrounding inflation and the Fed's role as a market catalyst appear to be lessening, hinting that the focus may shift to new government tariff policies in the near future.

Diving deeper into the CPI data reveals that the closely monitored "Owners' Equivalent Rent" metric saw a minimal month-over-month increase of 0.23%—its smallest rise since early 2021—yet the broader housing costs remain a persistent factor pushing up inflation rates, accounting for nearly 40% of the CPI increase

Indeed, the housing expenditure index rose by 4.7% year-over-year in NovemberOther significant contributors to this month’s CPI surge included food prices, used car sales, and healthcare costs, as both used and new vehicle prices reversed their recent declining trendsAccording to the U.SBureau of Labor Statistics, "almost no major price components experienced a decline."

In recent days, various Fed officials have voiced disappointment over the "stubborn inflation," suggesting that without further progress on addressing rising prices, the path to rate cuts in 2025 may require adjustmentsIf the Fed does lower rates by 25 basis points next week, this would reflect a total 1% decrease (100 basis points) in the federal funds rate since last September.

Renowned financial journalist Nick Timiraos, often referred to as the "new Fed whisperer," observed that core commodity prices had primarily driven the cooling of inflation over the past 18 months, yet this trend now appears to have been interrupted

For instance, the rise in automobile prices in November contributed to a core commodity price increase of 0.3%, which was a stark difference from the marginal monthly rises of 0.05% in October and 0.17% in September.

Anna Wong highlighted that the robust core CPI in November will likely raise concerns among a minority of the Federal Open Market Committee (FOMC) members, who may view the stagnation of inflation reduction as a reason to reconsider upcoming rate cutsShe pointed out, “While it is true that rental inflation has finally moderated, the commodity price inflation has lost its disinflationary momentum, with current monthly inflation rates aligning more closely with annual inflation rates exceeding 3%, rather than the Fed's target of 2%.”

Bloomberg interest rate strategist Ira Jersey noted that current inflation is closely tied to service industry trendsHe cautioned that emerging tariff policies may elevate commodity inflation, however, the fundamental drivers of current inflation remain unchanged: “As service sector inflation continues to grow at an annual rate of 4.5%, core inflation is unlikely to meet the Fed's target in the short term.”

Financial markets demonstrated a V-shaped rebound in 10-year Treasury yields, which surged back to daily highs near the market close, representing around a six basis point increase for the day

Additionally, the sensitive two-year Treasury yield saw a slight uptick, having dipped nearly five basis points following the CPI report.

Looking ahead, Wall Street consensus now anticipates that the Fed will pause rate cuts in January, taking into account potential inflationary pressures arising from tariffsBrian Coulton, Chief Economist at Fitch Ratings, commented on how the decline in core commodity prices has been critical to the overall cooling of inflation observed this year, but signalled that this trend appears to have ended: "With rising auto prices, core commodity prices rose by 0.3% month-over-month in NovemberAlthough inflation within the service sector is declining, the pace at which this occurs is painfully slow, primarily due to persistent rental inflation, currently at 4.6%, which is still significantly above pre-pandemic inflation levels."

As it stands, mainstream expectations in Wall Street posit that the Fed is likely to pause rate cuts in January

CIBC Capital Markets analyst Ali Jaffery shared concerns regarding potential rate cuts in 2025, arguing that if economic growth doesn't slow or price pressures fail to abate, the threats of a rate pause and prolonged easing cycle may increaseRichard Flynn, from Charles Schwab's UK division, highlighted comments from several Fed officials expressing dissatisfaction with the pace of inflation reduction, noting that November's CPI data has not assuaged these concernsSuch sentiments could steer the Fed towards a cautious approach, potentially pausing rate cuts to avoid exacerbating price pressures.

Finally, analyst Michael Brown from Pepperstone suggested a bifurcated outlook for the first quarter's monetary policy landscape, noting that Fed officials are increasingly worried about potential inflationary risks from tariff strategies as well as a broader "reflationary" fiscal policy stance that may amplify demand-driven price pressures in the future.