The U.S. inflation rate rose to an annual rate of 2.7% in November from 2.6% in October, according to Consumer Price Index (CPI) data released Wednesday by the U.S. Bureau of Labor Statistics. The month-on-month increase was 0.3%, marking the highest annual inflation rate since July.

This number was in line with market expectations and raised expectations that the Federal Reserve would cut interest rates at its December 18 policy meeting. Traders are pricing in a 99% chance of a 25 basis point (bp) rate cut, according to CME Group’s FedWatch indicators.

If the reduction is realized, it will be the third reduction since September, and the total reduction will be the full amount.

Rising food, housing, and transportation costs

Shelter costs, which have been a consistent driver of inflation in recent years, rose 0.3% in November. This accounted for nearly 40% of the overall CPI increase, but the impact was less pronounced than in previous months, when it contributed up to 90% of the monthly increase. Annual shelter inflation is currently 4.7%, down from a peak of 8.2% in March.

Food prices rose 0.4% in the month, and household food prices rose 0.5%, the largest monthly increase since January 2023. Key drivers include beef, which rose 3.1% in November, and eggs, which rose 8.2%. Egg prices are up 37.5% on an annual basis, with the Bureau of Labor Statistics citing the lingering effects of the bird flu outbreak and holiday demand. Meanwhile, prices for cereals and bakery products fell 1.1%, the biggest monthly decline since the index began in 1989.

Energy prices, which had been declining for six straight months, rose 0.2% in November, reflecting a reversal of that trend.

Prices of new and used cars also rose. Used car prices rose 2% and new car prices rose 0.6%, continuing a recovery from the previous decline.

Core inflation and market reaction

Market reaction was relatively muted. The U.S. dollar index rose 0.15% and S&P 500 futures rose 0.5% following the CPI release.

The Fed has been fighting inflation by raising interest rates since 2022. This has helped bring down the headline CPI from 9.1% in June 2022 to its current level of 2.7%.

But the Fed’s target annual inflation rate of 2% (measured based on the Personal Consumption Expenditures Price Index, which is highly correlated with core CPI) is particularly important for “onerous” items such as housing, health care, and healthcare. Therefore, this may not be possible in the short term. Insurance premiums, childcare fees, utility fees. Many of these items are based on annual fluctuations or are adjusted by regulatory decisions, making them less responsive to inflation measures.

Core CPI, which excludes volatile food and energy components, rose 0.3% for the fourth consecutive month, maintaining an annualized rate of 3.3%. The rate has remained unchanged since September, further confirming expectations for a rate cut from the US Federal Reserve.

If inflation stops accelerating, markets generally interpret it as a green light for the Fed to shift its focus from fighting inflation to promoting growth, allowing early interest rate cuts to prevent further economic slowdown. Governor Christopher Waller recently said he supported cutting rates “unless there is an upside surprise” in inflation.

As 2025 approaches, some analysts are pointing to the possibility of headwinds to lower inflation. These include the possible impact of new import tariffs, tax cuts and deportations under President-elect Donald Trump, all of which are seen as likely to increase consumer prices. There is.