Wednesday's consumer price index data pretty much cleared the path for a Federal Reserve rate cut next week. But policymakers are going to feel much better about cutting rates after Thursday's producer price index, which was hot on the surface but showed tepid inflation in health care services and other categories that feed into the Fed's primary inflation rate.
The S&P 500 rallied just short of a record closing high on Wednesday, but the index opened slightly lower on Thursday. While a rate cut was already a done deal for the Dec. 18 Fed meeting, today's data, including a jump in initial jobless claims, lowers the risk that Fed policymakers will offer a hawkish forecast for Fed rate cuts next year when they update quarterly projections next week.
PPI Details
The PPI rose 0.4% in November, topping 0.3% estimates. Core producer prices, excluding food and energy, rose 0.2%, as expected. However, there was good news below the surface.
Inflation was tame across a range of medical services, with flat prices vs. October for physician care and hospital outpatient care. Hospital inpatient care rose a mild 0.2%. Health care services is the biggest component of the core PCE price index.
Also, airline passenger services prices, which is the airfare gauge used for the core PCE price index, fell 2.1% in November. Portfolio management costs, which tend to move in the same direction as the S&P 500, which rallied 5.7% in November, surprisingly fell 0.6% on the month.
PPI components provide about 30% of the weight of the core PCE price index, while the CPI provides about 70%.
Based on the PPI details, Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, now expects the core PCE price index to rise just 0.13% in November. That would keep the Fed's primary core inflation rate at 2.8%, instead of the expected rise to 2.9%.
Initial Jobless Claims
New claims for jobless benefits surprisingly jumped 17,000 to 242,000 in the week through Dec. 7, topping 220,000 expectations.
Continuing claims, rose 15,000 to 1.886 million in the week through Nov. 30, are still trending higher, suggestive of lackluster hiring.
That provides more evidence that the labor market isn't heating up, after November's mixed jobs report.
Still, economists noted that the late Thanksgiving may have been a factor in the jumps in new claims following the holiday-shortened week.
CPI Inflation Hits And Misses
The overall CPI rose 0.3%, lifting the 12-month headline inflation rate to 2.7%, as expected. The core CPI also climbed 0.3% for a fourth-straight month, in line with forecasts. That kept the 12-month core inflation rate at 3.3%, matching estimates.
Goods Prices Bounce
Core goods prices rose a surprising 0.3% on the month, but were still down 0.6% from a year ago. That partly explains why markets reacted favorably to the CPI data. The bigger concern for the Fed has been services prices.
The increase in core goods prices came as new car prices rose 0.6% on the month, while the price of used cars increased 2%. Apparel prices rose 0.2%.
Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, wrote that the bump in new and used car prices likely was a short-term one tied to demand created by hurricane wreckage.
Food prices, which are excluded from core CPI inflation, rose 0.4%. The somewhat good news here is that prices for food away from home, which are part of the core PCE price index, rose 0.3%. Prices for food consumed at home, which aren't part of the core PCE price index, jumped 0.5%.
CPI Services Inflation Eases
The 0.3% rise in core services prices for a second straight month, after a couple of 0.4% monthly increases, is pretty good news.
Core services inflation over the past 12 months eased to 4.6%, the least since February 2022.
Owner's equivalent rent rose just 0.2%, the least since April 2021. That takes away some of the upside risk to the Fed's primary inflation rate, the core PCE price index. However, hotel and motel prices rose 3.7% on the month, the largest increase in more than two years.
Transportation services prices were unchanged on the month, the best reading since June, as airline fares rose 0.4%.
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Fed Rate-Cut Outlook
The odds of a third straight Fed rate cut at the Dec. 18 meeting are up to 98% vs. 86% before the CPI. But after next week, the Fed is still expected to pause.
Markets are now pricing in a 3.8% year-end federal funds rate for the end of 2025. Factoring in a quarter-point move next week, that implies a slightly higher likelihood of two quarter-point rate cuts next year than of three cuts.
Wall Street Reacts To CPI
Seema Shah, Chief Global Strategist at Principal Asset Management, wrote that the CPI report "likely confirms a Fed policy cut next week but, with monthly core inflation hitting its strongest rate since the inflation scare of early 2024, price pressures are hardly settling at a level that the Fed can be completely at ease with."
Shah highlighted the "good news" of moderating owner equivalent rent inflation. "But overall, the Fed will be concerned by the very stubborn nature of inflation and will be increasingly cautious about the upside inflation risks that President-Elect Trump's policies may bring."
S&P 500
The S&P 500 dipped 0.1% in early Thursday stock market action, after rallying 0.8% on Wednesday, closing just below Friday's record.
Through Wednesday, the S&P 500 is up 27.6% for the year and 5.2% since Election Day.
Be sure to read IBD's The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
