escalating U.S. inflation prompting questions about the Federal Reserve's actions
The persistent high inflation in the States continues to be a challenge, but economists anticipate the central bank to decrease interest rates for the third time in a row next week. In the upcoming months, the base effects could potentially bring down the inflation rate once more – or President Trump could potentially inflate it further.
In November, inflation spiked again, with consumer prices increasing by 2.7% compared to the previous year. This was a 0.3% rise on a monthly basis, the highest increase in seven months. Economists at Commerzbank, Christoph Walz and Bernd Weidensteiner, suggested that the slowing down of US inflation has come to a halt. This new data strengthens the likelihood that the US central bank (Fed) will soon slow down its interest rate reduction pace.
For instance, the cost of used cars went up by 2.7% within a month. The price increase for airline tickets also surpassed the average. Meanwhile, clothing was less expensive than in October.
Despite the increase in inflation, economists predict that the Fed will lower its main interest rate range to 4.25-4.50% during the upcoming week. However, the core inflation trend might be concerning for the Fed's Open Market Committee. The so-called core rate, which excludes volatile energy and food prices, sustained at 3.3% in November. This is significantly higher than the central bank's target of 2%.
Asbastian Hepperle, an economist at Hauck Aufhäuser Lampe Privatbank, stated that by early 2025, lower inflation rates could be expected for both the overall inflation and core inflation. Therefore, discussing a pause in the Fed's interest rate cuts is not yet warranted. The monetary policy continues to operate under restrictive conditions. The Fed remains able to take another step down the interest rate ladder.
Additionally, Thomas Gitzel, the chief economist of VP Bank, highlighted another potential risk – the threatened tariffs by the incoming US President Donald Trump. These tariffs could potentially make imports from Canada, Mexico, and China more costly. "This could ignite a new price dynamic," Gitzel suggested.
Despite the Fed's expected interest rate decrease, the core inflation rate of 3.3% in November is concerning, as it exceeds the central bank's target of 2%. This persistent high inflation rate, combined with the potential for President Trump to further inflate prices through tariffs, could pose a challenge for economists in the future.
