Latest Forecasts For November’s CPI Inflation Could Worry Fed

Many expect the U.S. Federal Reserve (Fed) to move towards pausing rate hikes in the first half of 2023. Unfortunately, on current forecasts inflation may not be coming down as fast as the Fed wants. This doesn’t mean that the Fed won’t start to ease up on rate hikes over the coming months, but continued elevated inflation data may make that decision a little more challenging.

Inflation Nowcast

The Cleveland Federal Reserve produces an inflation nowcast. Many important prices are publicly available, such as energy costs, so rather than wait for the official inflation report that takes a week or two to produce once the month ends, the Cleveland Fed looks at how prices are trending right now (hence the term nowcast) and creates a real-time estimate of inflation. Of course, this is not as precise and definitely not as official as the actual inflation numbers, but it often gives a pretty good read on where inflation could be heading before the official numbers arrive.

November’s CPI Report

Unfortunately, estimated inflation data for the month of October is not encouraging. Currently the Cleveland Fed’s nowcast has October CPI inflation running at +0.76% month-on-month. That’s high.

If that holds, it would be the highest monthly inflation reading since June, and represent an annualized inflation rate of almost 10%, if we saw that same increase every month of the year. Core CPI and PCE inflation are both running at just over 0.5% on the same estimates. This would put the November CPI report among the higher inflation readings that we’ve seen in the past 12 months.

December’s CPI Report

Then it’s early days for forecasting November inflation, which will be reported in December. Here, the numbers a little better, but still not encouraging, with estimated inflation ranging between +0.4% to +0.6% month-on-month depending on the inflation metric you pick. That’s a little better and if that forecast holds could suggest inflation is easing, but still, well about the Fed’s inflation target of 2% annual inflation.

When Is The November CPI Report?

On Thursday, November 10, at 8.30 ET the Bureau of Labor Statistics will report trends in the Consumer Price Index (CPI) for the month of October. Then November’s inflation figures will be released at the same time on Tuesday, December 13.

Will It Matter?

If inflation does come in hot in the November CPI Report, as seems likely, then the impact on markets and the Fed remains to be seen. Of course, the Fed will look at different components of inflation report. In there, they may find some early signs of prices cooling. It does appear used cars and apparel may be coming down based on recent reports, and softer housing costs should ultimately appear in the inflation figures too.

Still, it may be that the Fed chooses to pause hiking rates anyway. Rates are already fairly restrictive, and monetary policy is generally seen to work with a lag of about a year or so, so maybe the Fed will be willing to wait and see if inflation comes down in subsequent months. However, given the Fed has also expressed worry about inflation becoming entrenched, it’s a gamble they may not want to take.

Other Economic Concerns

The Fed’s focus so far in 2022 has been mostly on inflation. That’s because, broadly speaking, the Fed hasn’t had too much to worry about elsewhere in the economy. If the job market weakens or recession prospects rise, then the Fed may be tempted to pause, not because inflation is under control, but because of a rise in other economic risks beyond inflation. The U.S. housing market may already be a concern in this regard.

The life of Fed decision-makers is never easy, but current early forecasts suggest that the final CPI reports of 2022 may not provide the hints that inflation is dropping that the Fed would prefer. The Fed may still choose to pause, but upcoming inflation data may not make it easy.