Consumer inflation eased again in November

The consumer price index (CPI) edged fractionally higher in November, rising by just 0.1%, a result that was better than economist’s expectations. That limited increase pulled the year-over-year increase down to 7.1%. The index has now declined for five consecutive months since topping out at 9.1% in June.

Core inflation gains, which excludes more volatile food and energy prices, also showed signs of easing, rising by 0.2% for the month. A 1.6% decline in energy prices paved the way, although food prices remain sticky — up another 0.5% last month.

Whether eating at home or dining out, consumers are still feeling the pinch from rising food costs. That impacts all consumers but disproportionately hurts lower-income households for whom food costs represent a larger expense in their monthly spending budgets. Those in the bottom quintile of income earners spent over 30% of their income on food — more than double the percentage spent by middle-income households.

Shelter costs continue to rise at a rapid clip, up another 0.6% in November. The surge in housing costs last year led the way to higher rents as well, as demand for housing far outstripped available supply. The one-two punch of higher prices and skyrocketing interest rates took the wind out of the sails for housing, but the lagged effect is still apparent. That momentum in housing costs is likely to persist well into next year before easing.

Given its sizable representation in the index, accounting for about one-third of the total, the continued momentum in shelter cost increases appears likely to keep a practical floor under inflation and prevent more rapid progress in a return to the Fed’s 2% target.

Inflation has now declined 2.0% since summer — a welcome and hopeful sign for policymakers, consumers, and investors alike. For the Fed, the unexpectedly sedate monthly increase should provide reassurance that stepping back their pace of tightening isn’t premature. For consumers, any improvement is welcome news for spending budgets that have tightened considerably over the past year, squeezing on discretionary spending and creating sustained anxiety for lower-income households and those on a fixed income in particular. For investors that have seen their portfolios pummeled by declining prices for both stocks and bonds, a stabilization in interest rates would go a long way toward removing a significant source of uncertainty for the markets and could signal the potential for better days ahead.

That doesn’t mean that the economy or the market is out of the woods.

Against a backdrop of better inflation data, recession risk continues to rise. Layoffs have increased notably since their Q1 bottom and the pace of job creation continues to slow. Whether the Fed can successfully orchestrate a soft landing for the economy remains to be seen. Lower inflation is good news for the Fed, but it’s far too soon for policymakers to take a victory lap.

If inflation has been the frying pan, the potential for recession is the fire toward which consumers and investors alike are likely to turn their attention in the coming months.

The bottom line? There’s growing evidence that the worst of the inflation scare may be in the rearview mirror. On the horizon is the potential for a recession — the next hazard in the road that policymakers will need to navigate the economy around or potentially through.

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