US core inflation tracks below the Fed forecast
The Fed will probably keep interest rates unchanged next week after cutting the funds rate by 25bp to 3½–3¾% last month in a split decision.
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Core inflation, as measured by the core PCE deflator, was on the low side of expectations in November, tracking below the Fed’s forecast profile. The FOMC meets next week on 27-28 January, where the Fed will probably keep rates on hold until it gets better read on the economy, having cut the range for the Fed funds rate by 25bp to 3½–3¾% last month in a split decision.
In the background, the Supreme Court is hearing Fed Governor Cook’s unfair dismissal case, where the initial view of legal commentators is that the court is likely to rule against the government.
In terms of the numbers, the core PCE deflator posted an increase that rounded up to 0.2% in November. This was the fourth increase of 0.2% in a row, although the October figure is unreliable because many prices were interpolated because they were not collected during the shutdown of the federal government. Annual inflation was 2.8%, having fluctuated between 2.7% and 2.9% since May.
Inflation is tracking slightly below the Fed’s forecast, where the median FOMC estimate is for 3.0% annual inflation in Q4.
Other measures of core inflation, such as the median PCE deflator and the market sector core PCE deflator, were a little weaker than the core PCE deflator, increasing by only 0.1% in November, such that annual inflation on these metrics is running at about 2½%.
The recent pick-up in core goods prices has stalled, with prices unchanged in both October and November. Annual core goods inflation is running at 1.3%, which compares with pre-COVID deflation of 0.5%.
Business surveys show a large tariff-driven increase in input costs, with companies slow to pass on tariffs to consumers, preferring instead to save money by pausing hiring.
Some companies are also likely waiting to see whether the Supreme Court validates the Federal Court of International Trade’s ruling last year that most of the government’s new tariffs are illegal ("thousands" of companies are currently seeking refunds of duties paid).
If the pass-through of higher input costs to retail prices remains gradual, the risk is that hiring will be subdued in Q1 and Q2 this year..
The administration believes that the Supreme Court will rule in its favour, but has said for the first time in months that it is ready to introduce back-up tariffs if they lose the case.
Core services prices rose by 0.2% in November (the same excluding housing), having ranged between 0.2% and 0.3% since early last year. Annual inflation is running at 3.3% (the same excluding housing), which compares with a pre-pandemic rate of 2.2%.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 65 executives and over $20 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy, contributing to the investment decisions of the firm. Kieran has long experience as a macroeconomist in both the private and public sectors. He has worked most recently as Chief Markets Economist for National Australia Bank and was previously Chief Economist, Australia and New Zealand, for Barclays Bank and ABN Amro Bank/RBS. Kieran also worked as Principal Adviser on the macroeconomy and budget policy in the Commonwealth Treasury and Director of Forecasting.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 65 executives and over $20 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment...
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 65 executives and over $20 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment...
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