A rise in US core inflation highlights stubborn price pressures

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US core inflation rose last month, bolstering arguments that the US Federal Reserve should keep interest rates on hold for the coming months.

Figures released on Tuesday showed U.S. core prices rose 0.3 percent in November, a day before the Federal Reserve votes on borrowing costs, while the year-on-year key rate was 4 percent.

The annual core measure is considered a bellwether for long-term inflation, stripping out changes in energy and food prices.

The headline rate fell to 3.1 percent in line with expectations and slightly lower than October’s 3.2 percent rate.

After the data release, investors lowered expectations for an interest rate cut.

“The central bank keeps telling us that they are not confident that they can say with certainty that inflation will rise. [its target of] 2 percent at any time,” said Omair Sharif, head of the forecasting group. “I don’t think there can be hope after today’s numbers.”

He said the figures were not “all clear”.

Analysts took the key inflation data as a sign that the path to reducing the figure next year will be flat.

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

Central bank officials are expected to vote on Wednesday, keeping interest rates unchanged from the current 5.25 percent to 5.5 percent.

The S&P 500 rose 0.5 percent to its highest closing level since January 2022, while U.S. stocks ended higher. That’s about 3 percent below its all-time high earlier that month.

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

US Treasury Secretary Janet Yellen said Tuesday’s figures confirmed inflation was slowing “meaningfully”, while President Joe Biden insisted unemployment remained below 4 percent, despite the fall in the consumer price index.

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

The central bank prefers a less volatile metric – the key personal consumption expenditure index.

But Tuesday’s figures, which came more than a fortnight before PCE data, will affect how Fed Chairman Jay Powell intends to scale back markets’ rate cut expectations.

The central bank will release a summary of its latest economic projections on Wednesday, which will be closely watched for signals of how much cuts officials expect next year.

The central bank confirms that inflation in the services sector remains moderate. But Sharif said prices across the services sector rose 0.44 percent in November once housing, energy and food were factored in.

Tuesday’s figures indicated housing-related costs, based on how much homeowners believe their properties will rent, rose 0.5 percent on the month. This is partially offset by lower energy prices and other daily commodities.

“As prices continue to rise at an uncomfortable pace, policymakers are likely to remain hawkish, and central bank officials perceive inflation risks to the upside,” said Rubeela Farooqui, chief US economist at High Frequency Economics.

Strong U.S. jobs data released last week led some investors to reconsider expectations of a round of rate cuts starting in March.

But Alan Detmeister, a former central bank economist now at UBS, said the latest data were “generally consistent with slower inflation”.

He added that the central bank is likely to cut rates in March to ensure interest rates are not too restrictive for households and businesses once inflation approaches target.

Additional reporting by Nicholas Mega in New York

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