In a promising development for investors, inflation showed signs of easing on an annual basis in November, potentially paving the way for the Federal Reserve to maintain interest rates during its policy meeting this week. However, a slight monthly uptick in prices has intensified the ongoing debate about the timeline for the central bank to consider rate adjustments amid the moderation of inflation towards its 2% target.
According to the latest data from the Bureau of Labor Statistics, November witnessed a 3.1% increase in prices over the preceding year, marking a slight deceleration from October’s 3.2% annual gain. On a monthly basis, prices inched up by 0.1%, defying economists’ projections of a flat Consumer Price Index (CPI) month-over-month and a 3.2% year-over-year increase.
The headline figures were influenced by lower energy costs, as energy prices dipped 2.3% month-over-month and 5.4% annually. The decline was particularly driven by a 6.0% drop in gas prices from October to November and an 8.9% decrease on an unadjusted, annual basis.
On a “core” basis, excluding the volatile costs of food and gas, November’s prices climbed 4.0% over the previous year, matching the annual increase seen in October. Notably, this marked the first time since March that the annual core inflation rate did not decline. Monthly core prices saw a 0.3% increase, slightly higher than October’s 0.2% rise, in line with economists’ expectations.
Markets initially responded positively in premarket trading following the report indicating signs of easing inflation but exhibited mixed trends as the opening bell approached.
Commenting on the data, Michael Pearce, lead US 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.”
Additional insights from the inflation report highlight the shelter index, rising 6.5% on an unadjusted, annual basis, accounting for nearly 70% of the total increase in core inflation. On a monthly basis, the shelter index increased by 0.4%, a slight uptick from October’s 0.3% rise.
Within core inflation, rent prices remained elevated, with both the index for rent and owners’ equivalent rent rising by 0.5% on a monthly basis. Owners’ equivalent rent represents the hypothetical rent a homeowner would pay for the same home.
November saw increases in other indexes, including medical care and motor vehicle insurance, which rose 1.0% after a 1.9% increase the prior month. Used car prices, which had been trending downward in recent months, 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 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. Egg prices increased significantly by 2.2% month-over-month after a modest 0.1% increase in October.
However, certain indexes, including those for apparel, household furnishings and operations, communication, and recreation, decreased over the month, according to the BLS.
Despite inflation remaining notably above the Federal Reserve’s 2% target, investors are increasingly betting that the central bank will refrain from raising rates in December. This sentiment is reinforced by recent dovish remarks from Federal Reserve officials, including Fed governor Christopher Waller, who expressed confidence that interest rates are currently at the right level to combat inflation.
Following the release of the inflation data, markets were pricing in nearly a 100% chance that the Federal Reserve would keep rates unchanged on Wednesday, according to data from the CME Group. While the market anticipates the central bank to begin cutting rates at its March meeting, economists remain cautious about the timing, with a roughly 40% chance of a rate cut. Analysts suggest that more persistent wage and core inflation pressures are likely to keep the Fed on hold, with rate cuts potentially delayed until September.
In summary, the observed signs of easing inflation in recent economic data provide a hopeful conclusion, offering a positive outlook for market stability and investor confidence in the foreseeable future.
Source: Yahoo Finance
