The latest U.S. inflation figures are not as positive as they seem at first glance, and the markets have promptly caught on.
As expected, following Donald Trump’s victory in the November 5 Election Day, markets affected by the new President’s political agenda have shown a burst of euphoria. However, a few weeks later, as the final appointments to key government positions are awaited, the spotlight has shifted back to economic fundamentals, with inflation stealing the show.
Although October reports have been generally positive, a deeper analysis reveals potential clouds on the horizon. The annual U.S. inflation rate still remains under the Federal Reserve’s target 3% ceiling, a benchmark for stability.
The pace of decline seems to have stalled for now, with October data showing a smaller decrease than analysts’ forecasts, remaining consistent with previous months. Meanwhile, essential categories like housing and services—things that directly affect daily life—are still running hot, stubbornly and alarmingly above the 3% mark.
Using specialized metrics developed by Federal Reserve economists — such as the Cleveland Fed’s trimmed mean (which filters out extreme outliers), or Atlanta Fed’s “Sticky Prices” (focusing on slower-moving costs), it becomes evident that inflation isn’t under control yet.
Inflation remains a highly political issue, and the choice of President Trump’s new economic team will be a pivotal moment. The country could face significant shifts in macroeconomic policies, especially as they juggle tightening trade policies and inflation control. These goals may clash, increasing the risk of market turbulence, primarily affecting the U.S. dollar index and currency pairs like EURUSD or USDJPY.
With unemployment rising to 4.1%, a further drop in inflation seems unlikely. The CME Fed Watch tool, shows just over a 50% chance of a small 25-basis-point rate cut at the upcoming FOMC meeting on December 18. Beyond that, additional cuts are expected to be on hold until the new administration gets settled. Markets appear to have already adjusted to this outlook. Stock indices hit new highs, signs point to a potentially rocky start to 2025. To better understand these dynamics, free market replay tools can be invaluable. This tool allows you to review historical market data, helping analyze how past events influenced market behavior. By replaying key moments, you can identify patterns and make more informed decisions in the present.
