US CPI Preview: Inflation to decline, core rate stable

• US headline inflation forecast to drop after October's increase
• Core inflation rate set to gain
• Fed expectations for a December hike stable

The US Department of Labor will publish its Consumer Price Index report for November on Wednesday December 12th at 8:30 am EST, 13:30 GMT.

Predictions: Inflation to cool as energy prices wane

Overall inflation in the United States is expected to drop to 2.2% annually in November from 2.5%  the previous month as the sharp decline in crude oil prices work their way into consumption and production.  The monthly gain is forecast to drop to flat in November from 0.3%  in October.

West Texas Intermediate, the US price standard for oil peaked at $76.65 a barrel on October 3rd and fell sharply for the next two months reaching $49.78 on November 29th, largely on surging US and Canadian shale production.  It is currently $52.10 (9:45 EST, 12/11/18)

Consumer prices moved higher in the first half of the year and have declined since.  Starting in January at 2.1% annual CPI climbed to 2.5% in April, 2.8% in May and 2.9% in June and July. This was the highest reading for this basket of consumer staples in 10 years. 

Annual core inflation which excludes food and energy prices is predicted to increase to 2.2% in November from 2.1%. On the month no change is expected from the October gain of 0.2%. 

Core inflation has been lower and more stable this year. From 1.8% in January it rose to 2.4% in July before backing down to 2.1% in October.

Federal Reserve and the dollar

Inflation is one of the Fed's two Congressionally dictated mandates, the other is employment. The central bank tracks inflation through the core personal consumption expenditures price index, core PCE prices for short.  This gauge has been running slightly below the core CPI reading and the Fed's own 2% inflation target. In January of this year it was at 1.5% rose to 2% in May and July and was 1.8% in October. The November figures will be released on Friday December 21st.

A 25 basis point hike is widely anticipated at the December 18th-19th FOMC meeting bringing the Fed Funds rate to 2.5%. Fed Funds futures imply about a 70% chance of an increase this month.

Although Fed officials have been emphasizing in recent statements the central bank's dependency on economic data in determining rate policy, last month's CPI figures will have little impact on the governors' decision.  Lower PCE inflation will however, make the possible reduction in the number of projected rate increases for 2019 easier.

The dollar has been supported this year by the Fed's agressive rate normalization policy and the ebb and flow of safe haven demand as equitites, the US-China trade dispute and the trials of Brexit have roiled global markets. If, as expected the central bank does reduce the projected number of rate increases in 2019 this could inhibit the relative strength of the US currency.  But the dollar would still be backed by the only major central bank raising rates and the performance of the US economy. 

The slowing of US GDP expansion from the 3.3% yearly pace in the first three quarters and the 3.85% rate in the second and third quarters to 2.4% in the final three months of the year in the Atlanta Fed GDPNow estimate, will play a larger role in Federal Reserve policy. Adding to the Fed's caution is the turmoil in global equity markets, trade disputes and a potential recession in Europe and attendant macro-economic and political problems.

In the September ‘Projection Materials’ the bank posited four 0.25% increases through the end of 2019. One this month and three next year. The 2019 number is expected to be reduced to two or lower.