Coming just ahead of a critical U.S. Federal Reserve meeting, the November Consumer Price Index report due out overnight will provide important clues for the markets on just how much progress is being made in the fight against inflation.

Forecasts for the November CPI report center on a slight easing of inflation pressures for the month. But many in the markets will be looking beyond the November headline figures and to the details for hints as to where inflation may be headed in the months to come. This, in turn, coupled with the Fed meeting set to conclude Wednesday, will likely set the tone for the markets through the close of the year.

Roger Aliaga-Diaz, chief Americas economist at Vanguard Group, notes that the October CPI report had provided some comfort to investors, especially when it came to the CPI report’s reading on so-called core inflation, which excludes volatile food and energy costs. “It was nice to see the October data moving in the right way, and it would be nice to see another confirmation of core CPI stepping down to 6.1% or even 6% from 6.3% in October,” he says.

November CPI Report Forecast

Here’s the November CPI report forecast according to consensus estimates from FactSet:

  • CPI to rise 0.35% for the month versus 0.4% in October.
  • Core CPI to rise 0.3% for the month versus 0.3% in October.
  • CPI, year over year, to rise 7.3% versus 7.7% in October.
  • Core CPI, year over year, to rise 6.1% versus 6.3% in October.

Heading into the final weeks of the year, sentiment in both the stock and bond markets has improved thanks to clearer signs that inflation has peaked, and expectations that the Fed this week will slow down its unprecedented series of 0.75-percentage-point interest-rate increases to a smaller, but still aggressive, 0.50-percentage-point hike.

But speaking two weeks ago, Fed Chair Jerome Powell made clear he wasn’t yet satisfied with the limited declines in inflation, saying “it will take substantially more evidence to give comfort that inflation is actually declining. By any standard, inflation remains much too high.”

Some of the market’s comfort with the inflation outlook has deteriorated in the wake of continued strong economic data, including the November employment report, which showed an increase in wages. That’s fueled concerns about the potential for a wage-price spiral keeping inflation high if the economy doesn’t start to cool off.

Those concerns are particularly focused on the services sector of the economy, where wage pressures have been strong, and there is a close connection between employees’ wages and the prices paid by consumers.

Preston Caldwell, Morningstar’s chief U.S. economist, says that given the usual volatility that comes with the monthly CPI report, he’s going to be focused on one key dataset: core inflation excluding shelter.

‘The Most Important Category’ in CPI

Powell pointed to this measure in his Nov. 30 speech, saying, “this may be the most important category for understanding the future evolution of core inflation.”

Among the different components that make up the CPI report, Vanguard’s Aliaga-Diaz says that core services ex-shelter “is the one that is more impacted by wages, and the only one where the Fed has true control with higher rates cooling down the labor market, wages coming down and easing inflation pressures.”

Caldwell notes that core inflation ex-shelter has been showing a broad-based deceleration in the last several months. “That will probably continue, as improving supply chains are cooling off core goods prices,” Caldwell says.

But “core services inflation ex-healthcare and shelter is one bucket that will be an interesting question mark, particularly in light of the uptick in wage inflation shown in the last jobs report,” Caldwell says.