November saw consumer prices rise less than expected, as investors breathed a sigh of relief over the second month in a row with inflation numbers coming in cooler than expected.
The November Consumer Price Index (CPI), showed prices increased by 7.1% over the same time last year, and only a 0.1% increase over the prior month, according to the Bureau of Labor Statistics release on Tuesday. Economists had predicted a 7.3% rise in the yearly number and a 0.3% month over month climb, per Bloomberg numbers.
The “core” inflation number, removing volatile food and energy prices climbed 6% year over year, and 0.2% over the prior month. Consensus estimates had predicted a 6.1% yearly rise, and a 0.3% monthly increase in the Core CPI.
Stocks rose on the news as Treasury yields sank and Wall Street took to pondering the effects of this on the next FOMC meeting’s policy decision.
Although the figures showed inflation had decelerated modestly, essential items like housing continue to see prices rising aggressively, and well above the Federal Reserves 2% long-term price stability target level.
The Federal Reserve had embarked on an aggressive policy of monetary tightening, taking interest rates from 0%-0.25% at the beginning of the year up to the present 3.75%-4%. It is expected on Wednesday the central bank will announce another 0.5% interest rate hike.
Seema Shah, chief global strategist at Principal Asset Management said in a statement, “Another downside inflation surprise not only validates a Fed decision to slow the pace of rate hikes, it also raises hopes that the inflation surge may actually be tamed within the next 12 months. Yet, Powell will likely maintain an element of caution in his comments tomorrow.” She added that wage inflation from a jobs market which has not slowed significantly still remains a problem in the eyes of the Fed.
The November jobs report showed non-farm payrolls rose by 263,000, which brought the three month average up to 272,000, and revised away the moderation in average hourly earnings. Labor force participation dropped to 62.1%, meaning a significant number of job openings are still available. That is continuing to drive wages upward, which will drive additional inflation.
Shah noted, “The difference between inflation at 5% and inflation at 3% next year lies in the ability of the Fed to slow the labor market further, which likely requires further monetary tightening and absolutely no rate cuts.”
While the headline inflation reading has jumped around as energy prices have fluctuated, the core reading, which the fed prefers, has offered a more nuanced examination of the nature of inflation on important factors like housing.
The energy index was down 1.6% for the month, after a 1.8% increase in October. The decline was partly driven by a 2% decline in the gasoline category, following a 4% rise the price of gas in October.
The Shelter category, which makes up 30% of the headline CPI and 40% of the core CPI was the main driver of the all-items increase, as it more than offset the falls in the energy indexes. Shelter costs were up 7.1% year over year, making up nearly half the total rise in the core CPI.
Bright MLS Chief Economist Lisa Sturtevant said in a note, “Housing costs have a unique, symbiotic relationship with inflation.”
Food prices were up 0.5%, which was close to the 0.6% rise of October.
Used cars and trucks fell 2.9%, making a fifth consecutive decline in that portion of the report. Medical care was also down 0.5% in November, matching the change seen in October.
Meanwhile, communication, recreation, motor vehicle insurance, education, and apparel all increased.
