U.S. Inflation: The Last Good News For A While, Warns Truflation

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The month's most important global data release comes in the form of Tuesday's U.S. CPI inflation release, and we are told to expect another fall that takes headline inflation to the cusp of the 2.0% range.

Analysts at Truflation say their models are showing a reading of 3.0% is likely for November, down from 3.2% in October, but this will be the last of the good news for some time.

According to Truflation, December will see inflation tick up again to 3.5% as the stickiness of U.S. inflation becomes apparent, thereby disappointing expectations for Federal Reserve rate cuts to fall in the first half of 2024.

Truflation's U.S. CPI is compiled by collating over 18 million data points in real-time. This compares to 80,000 data points used by the BLS that are reported around 30 days after collection.

Oliver Rust, head of product at Truflation, says to expect deflation in the prices of goods to be evident in the November report, while services will continue to see price increases due to the tightness in the labour market.

This tightness was confirmed by Friday's non-farm payroll report for November, which saw all components beat analyst expectations and pushed back on market bets for the scale of rate cuts coming in 2024.

"We think this trend will continue in December, fuelled by holiday hiring and an uptick in consumer spending, and maintain our year-end US CPI forecast of 3.5%. Though we see this trend beginning to unwind in 2024, we do not believe the Federal Reserve will be able to bring inflation down again until well into next year," says Rust.

He says the Fed will be left with much to consider as we head into an election year. "We think rate cuts in the first half of next year are unlikely if the labour market remains as tight as it is today."

In November, two core categories in Truflation’s real-time US CPI index* saw downward price movements: transportation and housing for the first time since January 2023. Inflation in the transportation category is down 1.15% MoM, while housing saw a 0.68% monthly price decrease.

"This will be welcome news for consumers, but we anticipate that future oil price increases and tight housing supply will reverse this trend again in the short term," says Rust.

On the upside, the biggest contributors were food, health, household and daily items, and communications, driven primarily by the elevated prices of services.

In particular, the 0.32% monthly rise in food prices marked a reversal of the recent trend, driven in part by holiday spending.

Overall, Truflation’s U.S. CPI finished November at 2.91%, and since then, it has ticked up further to sit at 3.07% as of December 11.

"We believe policymakers will find it difficult to bring inflation down to its 2% target while maintaining maximum employment. A more pronounced softening in the jobs market will be essential to bring sticky inflation under control. Until we see this, interest rate cuts will remain off the table," says Rust.