In November, there were indications of a slowdown in inflation on an annual basis, offering a ray of optimism for investors who are hopeful that the Federal Reserve will keep interest rates steady in its upcoming policy meeting this week. However, the conversation has been stirred by a minor increase in monthly price upticks, prompting discussions on the potential timing for the central bank to contemplate rate reductions as inflation gradually approaches its 2% target.
The Bureau of Labor Statistics’ most recent data reveals a 3.1% year-over-year increase in prices for November, a modest deceleration from the 3.2% gain observed in October. Monthly, prices edged up by 0.1%, contrary to economists’ projections of a flat Consumer Price Index (CPI) month-over-month and a 3.2% year-over-year increase, as reported by Bloomberg.
The headline figures were mitigated by lower energy costs, with energy prices decreasing by 2.3% on a monthly basis and 5.4% annually. Falling gas prices contributed significantly, dropping by 6.0% from October to November and 8.9% on an unadjusted, annual basis.
On a “core” basis, excluding the more volatile costs of food and gas, November’s prices climbed by 4.0% year-over-year, aligning with the annual increase seen in October. This marks the first time since March that the annual core inflation rate has not decreased. Monthly core prices rose by 0.3%, slightly exceeding October’s 0.2% increase, defying economists’ expectations.
While premarket trading initially experienced an increase following the report, market behavior became mixed as they neared the opening bell, reflecting the ongoing trend of a slowdown in inflation.
Michael Pearce, lead U.S. economist at Oxford Economics, noted, “Another sharp drop in gasoline prices last month kept headline CPI inflation on a downward trend but core inflationary pressures remain more stubborn, with core inflation unchanged at 4%. With underlying inflation set to trend lower only gradually next year, we expect Fed officials to push back hard on market expectations that rate cuts could come as soon as spring.”
The inflation report highlights several noteworthy factors, including a 6.5% increase in the shelter index on an unadjusted, annual basis, accounting for nearly 70% of the total increase in core inflation. On a monthly basis, the shelter index rose by 0.4%, a slight increase from October’s 0.3% jump.
Within core inflation, rent prices continued to climb, with the indexes for rent and owners’ equivalent rent each rising by 0.5% on a monthly basis. Owners’ equivalent rent represents the hypothetical rent a homeowner would pay for the same home.
Other notable increases in November included medical care and motor vehicle insurance, rising by 1.0% after a 1.9% increase the previous month. Used car prices, which had experienced recent declines, rose by 1.8% after dropping 0.8% in October and 2.5% in September.
The food index increased by 2.9% in November over the last year, with food prices rising by 0.2% from October to November. The index for food at home increased by 0.1% over the month after a 0.3% rise in October. Notably, egg prices surged by 2.2% month-over-month, following a 0.1% increase in October.
Indexes for apparel, household furnishings and operations, communication, and recreation all decreased over the month, according to the BLS.
Despite inflation remaining notably above the Federal Reserve’s 2% target, investors appear confident that the central bank will refrain from raising rates in December, especially in light of recent dovish remarks from Federal Reserve officials. Fed Governor Christopher Waller expressed confidence late last month that interest rates are currently at an appropriate level to combat inflation.
Post-release of the inflation data, market indicators suggested an almost 100% likelihood that the Federal Reserve would keep rates unchanged on Wednesday, according to CME Group data. While the market anticipates the central bank might begin cutting rates at its March meeting, economists remain cautious about predicting a rate hike at that time. Michael Pearce stated, “Overall, this will do little to change the Fed’s recent communications that core inflation remains too strong to contemplate shifting to rate cuts any time soon… We see more stubborn wage and core inflation pressures keeping the Fed on prolonged hold, with cuts likely to be delayed until September.”
In conclusion, the recent economic data, underscored by November’s significant slowdown in inflation, sets the stage for a nuanced landscape, prompting investors and policymakers alike to carefully navigate the evolving financial terrain.
Source: Yahoo Finance
