US consumer inflation softened as expected last month, but underlying price pressures remained stubbornly strong, reinforcing odds on a more neutral stance from the Federal Reserve at tomorrow’s meeting – and beyond. 

According to data published by the Bureau of Labor Statistics this morning, the core consumer price index – with highly-volatile food and energy prices excluded – rose 4.0 percent in November from the same period last year, up 0.3 percent on a month-over-month basis. This was precisely in line with consensus estimates among economists polled by the major data providers ahead of the release. 

On a headline all-items basis, prices rose 0.1 percent on a month-over-month basis in November, up 3.1 percent over the previous year, and slightly below consensus forecasts. Americans paid -2.3 percent less for energy on a month-over-month basis, helping offset a 0.4-percent increase in shelter costs. Food prices decelerated, rising 0.2 percent in November, down from 0.3 previously. 

But the so-called “supercore” measure—which captures core services minus housing—accelerated to 3.93 percent year-over-year, suggesting that still-robust consumer demand, wage increases, and an array of cost-push factors continue to lift prices in the real economy. 

Short-term Treasury yields are moving slightly lower as investors reduce hedges against a more hawkish statement from Federal Reserve chair Jerome Powell at tomorrow’s meeting, equity futures are pushing higher, and the dollar is pulling back.

Bottom line: Inflation data remains consistent with a generalized moderation in price pressures, and isn’t likely to prompt further tightening from the Federal Reserve – but we also suspect signs of underlying stickiness could force officials to maintain a hawkish rhetorical bias for longer than markets currently anticipate. 

We think investors will eventually begin to question the likelihood of disinflation-driven rate cuts, partially reversing trades put on after Governor Waller’s comments in late November. At the time, he said, “If we see disinflation continuing for several more months — I don’t know how long that might be, three months, four months, five months… you could then start lowering the policy rate just because inflation’s lower. It has nothing to do with trying to save the economy. It is consistent with every policy rule”.