November Inflation Eases Disinflation Concerns

Investing.com — The November inflation report released this week has eased worries that disinflation is stalling, providing the Federal Reserve with room to potentially cut interest rates next week. However, Morgan Stanley analysts noted that the Fed's confidence regarding the rate-cut trajectory beyond December will shift from optimistic to cautious as signs of a stronger economy emerge.

Shelter Inflation Trends

According to Morgan Stanley economists, a downturn in shelter inflation reflected in the November Consumer Price Index (CPI) report should alleviate fears regarding stagnation in inflation progress. They remarked that a 25 basis point (bp) rate cut in December is practically assured ahead of the Fed's meeting on December 17-18.

The November CPI showed a deceleration in both rents and owner's equivalent rent within the shelter component. While it's premature to declare this a new trend in shelter inflation, it indicates that "slowing rental inflation is gradually being incorporated into official measures of inflation."

Future Rate Cuts

In the period following December, the Fed is expected to indicate that rate cuts will continue; however, there exists uncertainty about the extent and timing of those cuts. The Fed might revise its growth and inflation forecasts upward as recent data suggests economic strength, possibly compelling the central bank to limit its rate cut predictions.

Morgan Stanley analysts stated, "there is a reasonable chance the committee revises higher its estimate for potential growth and the neutral rate." Previously, the Fed anticipated rates would drop to 3.4% next year and then further to 2.9% in 2026.

"We still think the dot plot will show four rate cuts in 2025, but only one in 2026, for a terminal rate of 3.1%," the analysts noted.

At the upcoming press conference after the rate decision, Fed Chair Powell is expected to emphasize that "the Fed will proceed with more caution on rate cuts going forward."