If another Federal Reserve decision on interest rates is the main course on this week’s menu of economic news, Tuesday’s inflation report will almost certainly set the table.

Investors are hoping that a second straight tame report on the consumer price index (CPI) will increase the Fed’s comfort level with holding rates steady after a two-day meeting Wednesday – an outcome that’s virtually certain.

Markets would also love to see inflation data that helps coax officials to speed up anticipated interest rate cuts in its forecast for next year. The prospect of accelerated rate cuts – which typically make stocks more attractive than bonds -- already has sparked a torrid market rally the past six weeks.

Yet that may be a tall order.

While Tuesday’s CPI report is likely to show that overall inflation drifted down further in November, an underlying measure that the Fed watches more closely likely ticked up again, economists say. That probably wouldn’t spur the Fed to raise rates but it could lead officials to at least keep that option open and push back on the idea that rate cuts will be moved up, forecasters say.

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“We think this makes it more likely that the tightening bias in the (Fed) statement (the message that the Fed is prepared to hike again if needed) will be maintained,” Barclays wrote in a research note.

Other economic reports last week could also affect the Fed’s outlook Wednesday. Consumer inflation expectations fell sharply this month, which should help keep prices in check. And the job market generally continued to cool in November, though the unemployment rate declined.

Has U.S. inflation eased?

Inflation has slowed significantly since hitting a 40-year high of 9.1% in June 2022 amid COVID-related product shortages and consumer demand surges. But, at 3.2%, it’s still well above the Fed’s 2% target.  

To help corral soaring prices, the Fed has lifted its key interest rate from near zero early last year to a 22-year high of 5.25% to 5.5%. But Fed officials have put hikes on hold since July, and with inflation and the job market both cooling, most economists think the central bank is done raising rates.

Last month, CPI data revealed that annual inflation eased substantially in October from 3.7% to 3.2%. A core measure that strips out volatile food and energy items also dipped to 4% from 4.1%. That has helped stir hopes of Fed rate cuts and ignited stocks.

Is inflation expected to go down?

The November CPI report is expected to show that consumer prices were roughly flat on a monthly basis for a second straight month, lowering the annual gain to 3.1%, according to Barclays and Nomura. The drop likely was driven by another decline in gasoline prices and a modest uptick in food costs, the two research firms say.

But the core reading, which the Fed closely monitors, is projected to rise 0.3% from October, up from a 0.2% increase the prior month, and remain at 4% on a yearly basis, the economists say. That’s not so terrible but it also wouldn’t give the Fed cause to let down its guard.

What items are decreasing in price?

Prices of goods such as furniture and cars are likely to continue to fall as pandemic-related supply-chain snarls resolve.

But the cost of services -- especially rent, car insurance, auto repairs and medical care -- is likely to keep marching higher, Barclays says. That’s at least partly because of rapidly rising wages rooted in COVID-induced labor shortages.

Inflation, though, can be volatile from month to month. One reason that core inflation may have edged higher in November is that hotel rates were likely flat after declining four of the past five months, Barclays says.

That could have helped push up “supercore” inflation – a key measure of services prices that excludes housing and that the Fed is particularly scrutinizing – to 0.39% from 0.25% the previous month, Barclays says.

Nomura, meanwhile, reckons that both used car prices and airfares moved higher last month after falling previously. Barclays disagrees.

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“Barring any major surprises, we do not think the November CPI report will have a material impact on the Fed’s near-term outlook,” Nomura wrote to clients.

It could, however, affect the tone of the Fed's statement and Powell's remarks at a news conference, along with the mood on Wall Street.