The consumer price index (CPI) was unchanged in November, in line with expectations. Excluding the usually more volatile food and energy prices, core CPI increased by 0.2% for the month, also consistent with economists’ forecasts.
Those soft November results allowed the year-over-year headline CPI to edge lower to 2.2% -- its lowest result since February. Core inflation edged up to 2.2% for the year, but has remained largely anchored around that level for several months.
Of particular note was a 2.2% decline in energy prices for the month, as supply was more than ample and prices at the pump declined by more than 4%.
Service-related prices continue to rise at an accelerated clip, rising a moderate 0.2% for the month, but still up a solid 2.9% over the past year.
Supported by a strong economy and an active Fed, the strength of the U.S. Dollar over the past year has contributed to keeping price pressures in check. Further strengthening of the dollar could help to keep a lid on import prices and inflation, but indications that the Fed may slow their planned pace of rate increase raise some doubts about the degree of upside in the greenback. Tariffs, of course, are a wild card that could raise prices on select imports by an amount that more than offsets any benefit from currency appreciation.
Labor market conditions remain tight with unemployment firm at 3.7% and wage growth topping 3% on a year-over-year basis in November. Stronger wage growth still appears likely, and that should keep some upward pressure on inflation so long as those tight labor markets persist as expected.
Although the probability of a December Fed rate hike have slipped in the past week, the likelihood of one more increase to close out the year remains high. The real question is what lies ahead in 2019, and all eyes will be on the Fed’s policy statement and Chairman Powell’s comments at the associated press conference next week.
The bottom line is that inflation appears to have stabilized at least for now, as the Fed’s previous tightening has seemingly had the desired effect. With the economy now slowing moderately, the challenge will be for the Fed to thread the needle between taking sufficient action to keep a lid on inflation while not moving so aggressively to choke of growth. To that end, it would appear that central bank policy decisions in the coming months may prove critical.
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