US Inflation Review: Stasis to Prevent Fed Cuts in 2025

Summary

• US CPI aligned with expectations.
• Goods continued deflating, housing accelerated, and supercore inflation slowed.
• Trend measures show inflation becoming stickier.

Market Implications

• I still expect the Fed to cut 25bp in December, aligning with markets pricing 80% risk.
• I expect the Fed to remain on hold in 2025, against markets pricing about two cuts.

CPI Aligns With Expectations

October core and headline CPI prints were in line with expectations, roughly as Sam’s model predicted (Table 1).

MoM core CPI was roughly unchanged from September, with services remaining the main driver (Table 2).

Core Goods Inflation Slowed

Core goods inflation slowed to 5bp from 17bp in September (Table 3, Chart 1). This reflected a pickup in used car prices and deflation with other core goods.

Housing Inflation Accelerated

October OER rose to 40bp MoM and remained at 5.2% YoY from 33bp MoM in September (Chart 2).

Regardless, market rent indices (these aggregate rents tenants pay moving to new units) that tend to lead OER are not slowing (Chart 3). At the November FOMC, Chair Jerome Powell reiterated his confidence that, while housing inflation was the laggard in the disinflation process, it would eventually slow to levels consistent with the inflation target.

Supercore Inflation Picked Up

Supercore inflation was 31bp MoM and 4.4% YoY, respectively, down from 40bp and up from 4.3% in September (Chart 4). The negative prints in May-June now look like outliers and the YoY trend is stabilizing.

Medical and transport services inflation slowed while recreation inflation accelerated.

Inflation Is Becoming Sticky

Overall, the inflation pattern remains one of goods price deflation being not large enough to offset services inflation, which has started stabilizing well above target (Chart 5).

On a YoY basis, measures of inflation trends such as median price, trimmed mean and core inflation stopped slowing (Chart 6). However, sticky price inflation slowed by 10bp.

Market Consequences

Yesterday’s print aligns with my expectations of a Fed cut in December as it suggests core PCE, the Fed’s main focus, is likely to remain within the central bank’s comfort zone. Markets currently price about 80% chance of a cut, which aligns with my conviction.

The longer-term trend implied by yesterday’s release also aligns with my expectations of inflation remaining stuck above target next year, which will prevent the Fed cutting. By contrast, markets are pricing two 25bp cuts.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)