The Inflation Trend Is Not Our Friend
The Federal Reserve is about to triple down on its September rate cut mistake by reducing its benchmark for a third consecutive time next week.
The federal funds futures market currently implies a 95 percent chance of a Fed cut at the December meeting of the Federal Open Market Committee (FOMC). A 25 basis point cut will bring the cuts in the second half of 2024 to 100 basis points, a significant easing of the stance of monetary policy, despite a strong labor market and stubbornly persistent inflation.
The Department of Labor released its latest read on consumer prices on Wednesday. This showed consumer prices rising at a breakneck annualized rate of 3.8 percent in November, a big step up from the 3.0 percent annualized pace in October. Core inflation also rose at an annualized rate of 3.8 percent, up from 3.4 percent in October.
Note that we’re annualizing the month-to-month figures here because it highlights how far above the Fed’s target the most recent numbers are, and it makes the acceleration more obvious. Both core and headline inflation rose 0.3 percent for the month, matching the prior month’s core figure and ahead of the 0.2 percent previous reading for headline inflation.
“Inflation picked up in November, a sign that the path to bringing down price pressures remains bumpy,” is how the Wall Street Journal described the figures. The truth is, however, that inflation has not just proven to be “bumpy.” It’s been on an upward trend since bottoming out in June. The trend is for higher inflation month after month.
You can see this in the annualized three-month figures. Headline inflation is up three percent on a three-month annualized basis, up from 2.5 percent through October. Core inflation is up 3.7 percent, up from 3.6 percent.
If you exclude shelter from from core inflation (which you really should not but many analysts insist on doing so anyway), prices are up 3.5 percent on both a one-month and three-month annualized basis. That’s also an acceleration compared with 2.4 percent and 2.7 percent through October.
Core Goods Inflation Is Back
The prices of core goods—a metric that excludes food and energy—are no longer falling. New car prices jumped 0.6 percent in November compared with the prior month. Used car prices soared two percent even after rising 2.7 percent in October. Household furnishings and supplies rose 0.7 percent. Appliances prices rose 0.7 percent also.
One of the most salient baskets measured in the consumer price index is food. Prices for foods rose 0.4 percent in November, doubling the rate of inflation in the previous month. Grocery prices rose 0.5 percent, with four of the six major grocery store indexes increasing. That’s a kitchen-table squeeze that will not sit well with American consumers.
So, why is the Fed cutting? The Fed insists that the stance of monetary policy is still restrictive and that the neutral rate—the rate where policy is neither holding back the economy nor stimulating it—is still below the current rate. But where’s the evidence that policy is restrictive?
All the recent survey data indicate that the economy is not calling out for lower interest rates. Consumer sentiment is rising. Small business confidence is soaring, with the outlook barometer seeing the biggest surge ever recorded. The New York Fed’s measure of consumer confidence showed that year-ahead expectations improved considerably in November. The share of households expecting a better financial situation one year from now rose to its highest levels since February 2020. That is, confidence is back to where it was prior to the pandemic lockdowns.
While we think that the policy mix proposed by Donald Trump will stimulate non-inflationary growth by increasing investment in expanding the supply-side, the details remain to be seen, and legislation enacting large parts of the Trump plan will likely take months to pass. There’s no rush for the Fed to cut now—and considerable risk that inflation continues to build.
The Fed, however, has shown a deep reluctance to disappoint the market to the downside. So, it is almost certainly going to validate the expectation for a cut next week. That will be a third policy mistake in as many FOMC meetings.