Tuesday brought some encouraging news about the stubbornly high prices that have plagued Americans: inflation as measured by the consumer price index cooled sharply in November and is at its lowest level in nearly a year.
Prices rose 7.1% annually in November, down from 7.7% in October, according to the closely watched index from the Bureau of Labor Statistics, which measures the change in prices paid by consumers for goods and services.
The report comes as Federal Reserve officials begin their last two-day policymaking meeting of the year, where officials will analyze key economic data to determine whether their aggressive rate hikes have begun to cool the economy and reduce inflation. decades high.
The headline CPI rate for November marked the fifth consecutive monthly drop and was better than economists’ expectations of 7.3%. It was the lowest reading since December 2021 and a significant improvement from this year’s peak rate of 9.1% in June.
US stocks rose on the news, with the Dow rising nearly 700 points shortly after the opening bell.
“I think we’re finally getting some indication that we’re getting relief on the inflation front,” Ryan Sweet, chief US economist at Oxford Economics, told CNN in an interview. “[The moderation] is key for the Fed to release its foot from the brake. They’re not going to take the brake off completely, they’re still going to tighten monetary policy, but we’re moving in the right direction.”
Month-on-month, prices rose 0.1% last month, compared with October’s reading of 0.4%.
Core CPI, which excludes the volatile food and energy categories, measured 6% for the year ending November, below from the rate of 6.3% in October. On a monthly basis, the core CPI rose 0.2%, its smallest increase in 15 months.
“It looks like we’re coming down from that peak now,” Rucha Vankudre, a senior economist at Lightcast, told CNN. “We are still in the woods, but we see a way out.”
The Fed has raised interest rates at each of its last six meetings, including an unprecedented run of four three-quarter-point hikes, to help bring down the highest inflation since the early 1980s.
Economists and investors expect the Fed to approve a half-point hike at this meeting.
Tuesday’s CPI report showed used car prices fell 3.3% on a yearly basis and have fallen for five straight months. Categories like health care and airfare also fell in November.
Although food and energy prices are still 10.6% and 13.1% higher than November 2021, respectively, monthly increases for food moderate to 0.5% 0.6%, and energy prices decreased 1.6% from October to November, with the gasoline component falling 2% during that period.
Gasoline prices across the country are now averaging $3.25 per gallon, which is a 53-cent decrease from the previous month.
Current inflation woes continue to be driven by supply shocks, including Russia’s invasion of Ukraine and the pandemic, Sweet said.
“The good news is that the symbol of supply shocks (new and used car prices)… have fallen a lot in the last few months,” he said. “Hopefully, that’s an indication that some of the supply chain issues are turning disinflationary, because we need a lot of disinflation in goods to offset the inflation in services that we’re going to experience in the next six, nine, 12 months”.
Economists have raised concerns about inflation in service-related sectors and the possibility that they remain “fixed,” meaning that once prices go up, they don’t come down easily. The fundamental change in services prices rose 0.4% in November.
Despite the progress, much uncertainty remains, said Sung Won Sohn, a professor of economics at Loyola Marymount University and president of SS Economics. The war in Ukraine will continue to affect food and fuel prices, China’s reopening could be bumpy and the weather remains a volatile factor, he wrote in a note Tuesday.
Also, the “800-pound gorilla” is the cost of labor, he added.
“The job market is active, especially in services including healthcare, as well as leisure and hospitality,” Sohn said. “There are many more job openings than the available labor supply, leading to low unemployment and rapid wage growth. To be sure, the Federal Reserve’s drive to slow economic growth will eventually have a negative effect on the job market, but it will take time.”
House prices remain the largest contributor to the monthly CPI increase, the BLS noted.
That component is likely to stay high until next year, when CPI data reflect the yearly reckoning of market rents, which have been on the decline, Sweet said. That should help push inflation even closer to the Fed’s 2% target by the end of next year, she added.
However, one factor that could also contribute to lower inflation next year isn’t exactly welcome: a recession, Sweet said.
“We have a recession in our forecast, and that is very disinflationary,” he said. “I am never supporting a recession, but the Federal Reserve will err on the side of doing too much. But hopefully the Fed will take some comfort from this report and release the brake and just go higher. [rates] for 50 basis points [half a percentage point] tomorrow and then just do one more rate hike early next year.”