Deflation or Reflation? — Evening Brief – 12.10.24
The recent hiccup in the disinflationary trend has sparked debate among economists about whether this pause is temporary or indicative of more persistent inflationary pressures.
The consensus forecast for the November Consumer Price Index (CPI), to be released Wednesday, suggests that inflation trends will remain largely stable. Economists anticipate a slight increase in the year-over-year headline CPI to 2.7%, up from 2.6% in October. Meanwhile, core CPI is forecast to hold steady at 3.3%.
While inflationary pressures could persist in certain sectors, particularly shelter, the lagging effect of prior monetary policy tightening is largely expected to exert downward pressure on prices next year.
Yet, some economists see it differently. Josh Hirt, senior U.S. economist at Vanguard, believes “sticky” inflation will persist in November, especially with regards to shelter costs. “We don’t really see any material softening of that until we get into next year,” he said.
The incoming Trump administration’s proposed economic policies, specifically, raising import tariffs (60% to 100% on Chin, 25% on Mexico and Canada) and deporting millions of undocumented immigrant workers, could heighten reflation risks in 2025. Tariffs could deal a blow to companies across North America and trigger negative consequences for the global supply chain. The result could be higher costs for goods and services, potentially driving up inflation. Of course, the magnitude of these effects will depend on the scale and timing of the proposed policies, as well as how businesses and consumers adjust.
The reflation risk could complicate the Federal Reserve’s efforts to maintain price stability, especially following the recent period of disinflation. While a moderate increase in inflation might be welcomed as part of a balanced economic strategy, a sharp rise could prompt the central bank to reconsider its monetary policy stance and delay future interest rate cuts.
Fitch Ratings predicts that “the risk of stronger inflation in the US is on the rise amid the threat of higher tariffs and still-strong consumer spending.”
Nevertheless, another quarter-point interest rate cut is widely expected at the next FOMC meeting on December 17-18. As of today, the futures market is currently pricing in an 88% probability, according to the CME FedWatch Tool, slightly down from 91% last Friday.