Sticky US inflation binds Fed’s hands – What if it doesn’t get better?

The Federal Reserve can’t escape inflation’s grip. Sticky price pressures are making policymakers squirm as they get closer to their December meeting.

The personal consumption expenditures (PCE) price index — excluding food and energy, the Fed’s favorite inflation gauge — is projected to rise 0.3% for October. That’s not even the worst news.

On an annual basis, it’s set to hit 2.8%, the biggest climb since April. No rate cuts are happening unless something drastically shifts, and inflation doesn’t look ready to back off.

The number will drop Wednesday, just in time to ruin Thanksgiving for economists who’ll likely spend their holiday dissecting the results. By then, the Fed will already be knee-deep in meeting minutes from earlier this month, with Wall Street hanging on every word to see if policymakers hint at another rate cut.

Spoiler alert: they probably won’t. Chair Jerome Powell has made it clear that nothing is a done deal, and these numbers just give him more reason to play it safe.

Spending holds strong, but income growth wavers

Consumer spending, which doesn’t adjust for inflation, is expected to rise 0.4% in October. Not bad, right? Except that’s down from a 0.5% increase the month before.

Sure, people are still spending, but inflation keeps eating into their wallets. It’s like filling a bucket with a hole in the bottom—looks fine until you notice the water level isn’t climbing fast enough.

Meanwhile, personal income is predicted to rise another 0.3%, mirroring September’s growth. This steady pace reflects decent job gains, but hiring isn’t exactly booming anymore. The labor market is still healthy, but it’s definitely cooling down.

When income rises just enough to keep up with inflation but not outpace it, the Fed gets nervous. Growth like this doesn’t justify aggressive rate cuts.

So, what does all this mean for the average person? It means we’re spending more and earning a bit more, but price hikes are clawing back those gains. Resilient household spending helps avoid a recession, but it also keeps inflation alive—exactly what the Fed doesn’t want.

A data avalanche before Turkey Day

Along with PCE data, the government will drop a mountain of reports covering everything from GDP revisions to durable goods orders. That’s not even the full list. Throw in jobless claims, the merchandise trade deficit, and the third-quarter GDP update, and we’ve got ourselves a full-on data storm.

Let’s break it down. The GDP revision could confirm the economy’s insane 4.9% annualized growth rate for Q3. That’s great on paper, but it might just encourage the Fed to stay cautious.

Durable goods orders will tell us if businesses are still confident enough to invest in equipment and machinery—an important indicator for the manufacturing sector.

Jobless claims, meanwhile, are a weekly pulse check on the labor market. And let’s not forget the merchandise trade deficit, a number that often gets buried under bigger headlines but shows how much more we’re importing than exporting.

November meeting minutes: Another rate cut or nah?

On Tuesday, the Fed will release the minutes from its early November meeting. This is where investors will be hunting for any clue about the central bank’s plans for its December gathering. As of last Friday, markets were giving slightly better-than-even odds for another quarter-point rate cut. Don’t get too excited, though. Powell has made it painfully clear that the Fed is in no rush to slash rates again.

Bloomberg’s team of economists had this to say about the Fed’s current stance: “They’ve softened their easing pace because risks to the economy have eased. It’s not just about inflation; it’s about playing the long game.”

Translation? The Fed isn’t panicking, but it’s not celebrating either. If the minutes reveal any dissent among policymakers, expect markets to react. It’s one thing for Powell to preach caution, it’s another if the entire committee isn’t on the same page.

December’s decision will likely depend on the November consumer and producer price indexes, but the PCE data will still weigh heavily. The Fed has been using this gauge as its inflation North Star, and any surprises could tip the scale.

The global view

The Fed isn’t the only one sweating inflation. Canada’s third-quarter GDP numbers drop Friday and could dictate whether officials go big with a 50-basis-point rate cut or stick with a safer 25-point trim in December. 

Right now, GDP growth looks sluggish at 1%, but some economists think the expenditure-based figures could inch closer to 1.5%. That would support a slower rate-cut approach, mirroring the cautious tone set by the Fed.

Europe is also watching inflation closely. The eurozone’s November inflation report, due Friday, is expected to show price growth jumping 2.3% annually—the fastest in four months. While the European Central Bank (ECB) calls this a temporary spike, markets aren’t so sure. Inflation expectations are a fickle beast, and ECB policymakers will need to address them sooner rather than later.

Germany’s Ifo index, measuring business expectations, will offer insights into how Europe’s largest economy feels about a post-Trump world. Donald Trump’s re-election has revived fears of new tariffs, which could further complicate trade relationships.

Over in Asia, China releases purchasing managers’ indexes this week, covering both factory and service activity. These numbers will give economists a clearer picture of whether Beijing’s recent stimulus efforts are working. Early signs suggest they are, but don’t expect fireworks just yet.

Japan is set to drop its factory production, retail sales, and price growth data from Tokyo. These figures will show how the economy is holding up amid global headwinds. New Zealand, meanwhile, might cut rates by 50 basis points to jumpstart its economy. The Bank of Korea is expected to hold rates steady as it balances a weak economy with a strong dollar.

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