December Interest Rate Cut Is Almost A Done Deal: Could Wednesday Inflation Data Derail Investor Hopes? (CORRECTED)

Editor’s note: This story has been updated to remove a sentence that was erroneously included.

The November Consumer Price Index, released at 8:30 a.m. ET Wednesday, could deliver the final piece of the puzzle for the Federal Reserve’s much-anticipated Dec. 18 meeting.

Markets are betting on an 86% chance of a 25-basis-point rate cut, as per CME FedWatch, which would lower the federal funds rate to a range of 4.25%-4.5%.

Yet inflation data could tip the scales, either offering markets a year-end boost or throwing a wrench into the prospects of a Santa Claus Rally.

Headline CPI Seen Accelerating, Core Remains Sticky

Economists expect annual CPI inflation to rise from 2.6% in October to 2.7% in November, according to TradingEconomics consensus estimates.

If accurate, this would mark the second consecutive increase in annual inflation, signaling some persistent upward pressure. On a monthly basis, CPI is forecast to grow by 0.3%, compared to the 0.2% monthly increases recorded in the last four reports.

Core CPI ? which excludes volatile food and energy prices ? is projected to remain steady at 3.3% year-over-year, with a 0.3% monthly gain, mirroring October’s pace.

"We expect core CPI to be a little bit softer relative to its recent trend. Indeed, we are looking for a 0.2% month-over-month print. If that proves correct, we think it will greenlight a Fed cut in December," Bank of America economist Stephen Juneau said in a recent note.

One notable factor contributing to the expected cooling in core inflation is airfare prices. Bank of America forecasts a 1% decline in airfare prices month-over-month, reversing the upward trend of the past three months. This dip could shave 1 basis point off core inflation after contributing a 3-basis-point increase last month.

‘Live’ Fed Meeting Awaits

Even if the data aligns with the forecasts, the Fed’s decision isn't a done deal.

"Recent Fed speak suggests it will be a live meeting, and cuts beyond December aren’t a guarantee," Juneau added.

Yet the investment bank’s baseline scenario predicts that policymakers will deliver the highly anticipated 25-basis-point cut.

To justify a pause in December, Bank of America indicates a core CPI exceeding a 0.3% monthly increase.

Next week, the Fed will also weigh broader economic trends, including employment and consumer spending, as it deliberates its next steps.

Traders: Hope For The Best, Brace For The Unexpected

For market participants, November's inflation report carries both risks and opportunities.

According to Bank of America derivatives analyst Ohsung Kwon, S&P 500 options are pricing in the smallest implied reaction to CPI data since 2021.

Kwon advised investors to hedge their bullish positions, recommending to take advantage of the cheap cost of hedges to protect against downside risks in case of a higher-than-expected CPI print.

“Firmer CPI: hedge with cheap SPY puts,” Kwon said.

Recent inflation releases have shown mixed effects on equities. The S&P 500, as tracked by the SPDR S&P 500 ETF Trust (SPY) , has delivered muted reactions to the last two CPI reports but rallied by 1.1% following August CPI data in September.

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