The bottom line: Easing inflation? TBD
- The federal government shutdown has made the interpretation of recent economic data unusually messy, and the November report on consumer inflation is no exception. With insufficient data to issue a reliable October reading, the government’s two-month CPI report provided overdue and widely anticipated insights into the inflation picture.
- On the surface, the news on inflation was good — better than expected — and may help to clear the path for further Fed easing. But enough questions will be raised to keep a January cut from being a slam dunk.
- The report still leaves some questions unanswered, most notably about whether the limitations imposed by reduced staffing and the government shutdown render the results less precise or reliable. Calculating inflation has always been subject to assumptions and statistical massaging of the numbers; it’s never been a perfect science. The question today centers on the degree to which estimation and statistical modeling was needed to fill in some blanks and provide a more complete picture than would typically be the case.
- That unknown should become clearer in the coming months as additional data is collected and analyzed.
- Subject to that meaningful asterisk, the November inflation data was encouraging. A modest increase over a two-month period won’t assuage consumer frustration over high prices but at least provides evidence that the inflation pressures are easing.
By the numbers: Core and headline CPI edge lower
- The consumer price index rose 0.2% since September, fractionally weaker than the consensus forecast that called for a 0.3% increase.
- Core CPI, which excludes food and energy, rose in line with the headline advance — also 0.2% for the period spanning October and November. That also compared favorably to economists’ consensus expectation for a 0.3% rise.
- With both readings for recent consumer inflation coming in soft, the 12-month index also retraced some of its multimonth advance, dipping to a headline reading of 2.7% and a core advance of 2.6% for the year ended November 30.
- That marked the lowest point for the index since two consecutive monthly readings of 2.7% last summer and was in line with the 2.7% 12-month increase from one year ago.
Good news or “good data?”
- Stocks advanced this morning on the heels of the unexpectedly tame inflation report, an unsurprising result for a market that would enthusiastically embrace further Fed rate cuts.
- Coupled with the lackluster November employment report, any indication that inflation pressure is easing could clear the way for the Fed to trim its policy rate further early next year. At least on the surface, the November CPI report seems to check that box.
- That’s good news for stocks and could help to justify (or at least underpin) a market advance that has stretched valuations for high-flying growth stocks to multidecade highs.
- Still, the report justifiably raises some eyebrows for its unusually tepid nature coming on the heels of a four-month stretch in which the headline CPI advance averaged 0.3% per month. Moreover, price increases were contained across various categories of goods and services; this wasn’t just a story of an unusually steep drop in some sleepy part of the index.
- The question is whether the inflation news is in fact good and whether the data is good. Was it indicative of positive progress toward bringing consumer inflation back toward the Fed’s 2% target? And, importantly, was the reported data “good” — was its quality and completeness sufficient to provide an accurate picture of actual consumer inflation over the period.
- On that note, it’ll likely take another few months of data to either validate the November inflation report as an accurate representation of solid progress toward the Fed’s goal, an anomalous byproduct of other factors, or some combination thereof.
- Beyond the shutdown-related noise, the other underlying question concerns the seemingly muted impact of tariffs on goods inflation. Whether the full effect of tariffs has been delayed or simply not being passed along to consumers to the degree expected is unclear. Tariffs may not have reignited price pressures meaningfully, but they’ve still slowed the Fed’s progress toward its 2% target. Is there a further ripple effect from tariffs yet to wash through the numbers in the coming months? Stay tuned.
- What will this report mean for Fed policymakers? That may depend on how skeptical they are about its accuracy. They’ll have the December CPI report in hand before they’ll have to make a decision. The December data on jobs and inflation will weigh heavily into their calculus, but the one-two punch of rising unemployment and weaker inflation in the November data increases the likelihood that Fed policymakers may not be done trimming yet.
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