New York: U.S. consumer prices saw their largest increase in seven months this November, signaling a persistent inflationary trend despite hopes for a slowdown. However, the Federal Reserve is still expected to implement a third consecutive interest rate cut next week to support the cooling labor market.
While the inflation fight remains challenging, there was some positive news. Rents, a key driver of inflation, rose at the slowest pace in almost three and a half years. Similarly, the rise in motor vehicle insurance prices moderated. These factors helped slow the increase in services inflation, which had been a significant concern.
Nonetheless, inflation has largely stagnated in recent months, with no significant improvement in underlying price pressures, according to the latest report from the Labor Department. The consumer price index (CPI) rose by 0.3% in November, marking the largest increase since April, after remaining steady at 0.2% for the previous four months. Shelter costs, including hotel and motel rooms, contributed nearly 40% of the CPI rise, with lodging away from home increasing by 3.7%, the highest since October 2022.
Food and Gas Prices Surge
Food prices also saw a significant uptick, rising 0.4% in November after a 0.2% increase in October. The cost of groceries spiked 0.5%, with eggs surging 8.2% due to an ongoing avian flu outbreak. Beef prices also rose, while nonalcoholic beverages became more expensive. On the other hand, prices for cereals and bakery products dropped by 1.1%, the largest decline since the government began tracking the series in 1989. Gasoline prices rebounded by 0.6%, and piped gas saw a 1.0% increase.
For the 12 months ending in November, the CPI rose by 2.7%, a slight increase from October’s 2.6%. This is a significant slowdown from the peak of 9.1% in June 2022. However, the focus has now shifted to the labor market, with job growth improving in November following a disruption caused by strikes and hurricanes. Despite this, the unemployment rate edged up to 4.2%, after holding steady at 4.1% for two consecutive months.
Core Inflation Remains Stagnant
Excluding volatile food and energy costs, the core CPI also increased by 0.3% in November, remaining unchanged for the fourth consecutive month. Rents rose by 0.2%, marking the smallest increase since July 2021, while owners’ equivalent rent saw a modest 0.2% rise, the smallest since April 2021.
“The slowdown in residential rental prices is a significant development,” said Kathy Bostjancic, chief economist at Nationwide, noting that it aligns with real-time rent prices. The cost of motor vehicle insurance rose slightly by 0.1%, while healthcare services and airline fares increased by 0.4% and 0.4%, respectively.
Core PCE Inflation Forecasts
Over the past year, core inflation, which excludes food and energy prices, rose by 3.3%, matching the increase in October. Over the past three months, the core CPI averaged a 3.7% annualized rate. Economists expect the core personal consumption expenditures (PCE) price index to rise 0.2% in November, marking a slight slowdown from October’s 0.3% increase.
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Despite this stagnation in inflation progress, financial markets reacted positively. Investors took comfort from the moderation in rent costs and the stabilization of core inflation. Stocks on Wall Street traded mostly higher, while the dollar rose against a basket of currencies. U.S. Treasury yields fell, signaling investor confidence in the Fed’s actions.
Future Rate Cuts and Inflation Outlook
Financial markets are largely anticipating a quarter-percentage-point rate cut at the Fed’s December 17-18 policy meeting, as forecast by the CME Group’s FedWatch Tool. However, economists expect fewer rate cuts in 2025 as the Fed reassesses the inflation outlook. While inflation is expected to ease further, the effects of looming tariffs and mass deportations could offset some of the relief.
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The Federal Reserve’s monetary policy easing cycle began in September, with the benchmark overnight interest rate now in the 4.50%-4.75% range. The Fed had raised interest rates by 5.25 percentage points between March 2022 and July 2023 in a bid to tame inflation. But with inflation remaining stubbornly high, the Fed is likely to revise its forecast for future rate cuts.
“The lack of meaningful progress on inflation suggests that the Fed will signal just three rate cuts in 2025, as opposed to the four originally projected in September,” said James Knightley, chief international economist at ING.
