The consumer price index inched higher in November
Progress continues in the Fed’s battle to bring inflation under control, most recently aided by a notable decline in crude oil prices that rippled through energy costs more broadly.
The consumer price index inched higher in November, rising by just 0.1%, a result that was in line with economist’s expectations for the month. That was sufficient to allow the trailing 12-month index reading to edge down to 3.1%, matching its lowest level since March 2021, shortly before inflation surged to multidecade highs.
Despite modest progress in headline inflation, the core index held steady at 4.0%, with the one-month increase holding a bit firmer than the headline result at 0.3%.
The underlying components were once again a mixed bag for the average household, as shelter costs continued to rise at an accelerated pace, food price increases slowed, and gas prices receded.
Shelter costs will be a key to further easing in inflation given its significant representation in the index. Rental rates have shown signs of stabilizing already, although it takes time for the effects to filter into the index. The delayed effect of relative rent stability should help to bring core inflation further back toward the Fed’s 2% target, although the timing remains in doubt.
The report had a little something for everyone. Inflation pressures continue to recede, although the pace of decline doesn’t provide an unequivocal “all-clear” signal for Fed policymakers. Core inflation in particular remains well above the Fed’s target and the pace of progress toward that goal has slowed in recent months.
Moreover, the sting of high prices for the average American hasn’t gone away. Prices are no longer rising as rapidly but continue to increase and remain much higher than had been the case pre-pandemic. Consumers are still adjusting to the new reality of higher prices — one that’s reflected clearly in gauges of the consumer mood that have been mired in a range typically only seen during recessions. The economy has been growing, but rapidly rising prices have left many Americans justifiably feeling that they’ve been falling behind in recent years.
Signs of lower inflation and slower growth have contributed to a surge in expectations that the Fed will be well positioned to cut short-term interest rates next year, despite a continuing message from Fed policymakers that they may need to keep rates higher for longer than many anticipate. How much of that is simply the Fed jawboning to manage expectations and restrain excessive risk-taking remains to be seen, but policymakers are keenly aware of financial conditions broadly in assessing the appropriate level for short-term policy rates. The recent easing in financial conditions could leave the Fed with no choice but to lean into holding rates higher for longer as a counterbalance. Fed Chair Jay Powell has made a point to keep the possibility for further rate hikes on the table, although that seems increasingly unlikely as the economy slows.
For those in the soft landing/rate cut camp, the November inflation report provides further — albeit modest — evidence of progress toward that goal. For those in the higher-for-longer camp, the stickiness of core inflation around 4% and lack of progress in recent months provides the argument to push back against rate cuts in the near term.
The bottom line? Inflation still appears to be on a slow path to normalization, but the stickiness of core prices in a range well above the Fed’s target could give policymakers reason to hold rates steady for the time being. The worst of the inflation scare is behind us, but labor conditions are still relatively tight, keeping upward pressure on wages still firmly on the radar for policymakers. For a Fed that doesn’t want to declare victory prematurely, the urge to cut its policy rate is likely still quite low, regardless of what investors are hoping for. As such, the Fed is likely to continue to walk its policy tightrope — acknowledging that progress has been made while warning that their work may not yet be done.
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