The consumer price index showed that core prices firmed up a bit in November on hot services prices, though lower gas prices contributed to a drop in the CPI inflation rate. The S&P 500 was directionless in Tuesday morning trade following CPI data that might discourage any dovish Federal Reserve policy signals on Wednesday.
CPI Inflation Report Hits And Misses
The overall consumer price index rose 0.1% on the month, above expectations of a flat reading. The 12-month CPI inflation rate fell to 3.1% from 3.2% in October, as expected.
The core CPI, which strips out volatile food and energy prices, rose 0.3% vs. October levels, in line with estimates. The annual core CPI inflation rate held at 4%, matching forecasts. The core CPI inflation rate peaked at a 40-year-high 6.6% in September 2022.
Core goods prices fell 0.3% on the month. Over the past 12 months, core goods prices are unchanged. Core services prices rose 0.5% from October, while the 12-month change held at 5.5%.
Fed Chair Jerome Powell has said that the most important category of spending for the inflation outlook is core nonhousing services, reported with the Commerce Department's late-month personal income and outlays data. Wall Street looks to the CPI gauge of services less rent of shelter as a reasonably close proxy.
October's CPI report showed services less rent of shelter prices rose 0.6% on the month after gains of 0.3% and 0.6% the prior two months.
CPI Report Details
Energy prices fell 2.3% on the month and are now down 5.4% from a year ago.
Prices for food served at home rose 0.1% vs. October. The 12-month inflation rate eased to 1.7%.
Food away from home prices, which tend to be more affected by labor costs, rose 0.4% on the month and 5.3% from a year ago.
The CPI report showed used car prices rising 1.6% on the month, but falling 3.8% from a year ago. New vehicle prices dipped 0.1% on the month, lowering the 12-month increase to 1.3%.
Apparel prices fell 1.3% and are now up 1.1% from a year ago.
Transportation services prices rose 1.1% on the month, even as airfares fell 0.4%. A 1% rise in motor vehicle insurance was a big contributor.
Medical care services prices rose 0.6%, the biggest increase in more than a year, as health insurance prices rose 1.1% on the month.
Prices for shelter rose 0.4% from October. The monthly gain was restrained by a 1.1% drop in hotel and motel prices.
Fed Policy Impact
Incoming data suggests the Fed has made enough progress in lowering inflation and slowing growth to turn the page on rate hikes. But persistent strength in service prices could mean that policymakers wait for clearer signs of a slowdown before shifting to rate cuts.
Fed chair Powell has said policymakers want to see six months of tame inflation data to be sure that the disinflationary trend isn't fleeting.
The six-month annualized rate for overall CPI inflation in November is running at 3.35%, while the core CPI inflation trend is 2.9%.
Ahead of the CPI report, markets were pricing in just 2% odds of a quarter-point Fed rate hike on Wednesday and Dec. 13 and on Jan. 31. Markets saw 47.5% odds of a rate cut by the March 20 meeting and a likelihood of 1.25% worth of rate cuts next year.
After the CPI data, March rate-cut odds dipped to 46%.
In the six months through October, the Fed's preferred PCE inflation and core PCE inflation gauges ran at just a 2.5% annual rate. Wednesday morning's producer price index report on wholesale prices will include data on health care services, airfares and portfolio management fees that feed into the PCE price index, the Fed's primary inflation gauge. That will help economists sharpen their forecasts for the end-of-the-month PCE inflation update.
The Fed May Throw This Curveball, Raising Floor For 10-Year Treasury Yield
S&P 500
The S&P 500 erased early losses, trading flat after a modestly lower open in Tuesday stock market action. The S&P 500 rose 0.4% on Monday to close at a 52-week high. The S&P 500 is now just 3.6% below its all-time closing high on Jan. 3, 2022.
The S&P 500 made a late-day advance on Monday as the 10-year Treasury yield pulled back from an intraday high of 4.29% to close at 4.24%. The 10-year Treasury yield dipped to 4.23% on Tuesday after the CPI data.
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