Inflation slowed again last month, more than expected, as the Federal Reserve raised interest rates at the fastest pace in decades.
The Consumer Price Index (CPI) in November showed a 7.1% increase over last year and 0.1% increase over the month, the Bureau of Labor Statistics said Tuesday. Economists had expected prices to rise at an annual 7.3% clip and 0.3% month-over-month, per Bloomberg data.
On a “core” basis, which strips out the volatile food and energy components of the report, prices climbed 6.0% year-over-year and 0.2% over November. Consensus estimates called for a 6.1% annual increase and 0.3% monthly increase in the core CPI reading.
The report propelled U.S. stocks forward and sent Treasury yields lower as Wall Street weighed the implication of softer prints on Federal Reserve policy. Contracts on the S&P 500 rallied 2.8%, while futures on the Dow Jones Industrial Average soared more than 700 points. Nasdaq futures jumped 3.8%.
While November’s figures showed a modest deceleration in inflation, the costs of essential items and housing facing U.S. consumers still remain stubbornly high and well above the Federal Reserve’s long-term price stability target of 2%.
The Fed keeps a closer eye on “core” inflation, which offers policymakers a more nuanced look at inputs like housing. The headline CPI figure, in contrast, has moved largely in tandem with erratic energy prices this year.
The energy index declined 1.6% for the month after a 1.8% rise in October. The downshift was driven in part by a 2% slide in the gasoline category of the measure after gas prices rose 4% in October.
While falling energy prices sent headline inflation lower last month, the shelter category of CPI — which accounts for 30% of overall CPI and 40% of the core reading — was the dominant contributor to the monthly all-items increase and more than offset declines in energy indexes. The cost of shelter rose 7.1% over the last year, comprising nearly half of the total increase in core CPI, the Bureau of Labor Statistics said.
“Housing costs have a unique, symbiotic relationship with inflation,” Bright MLS Chief Economist Lisa Sturtevant said in a note.
In a speech at the Brooking Institution in Washington D.C. last month, Federal Reserve Chair Jerome Powell emphasized that housing inflation has risen rapidly, while inflation in other core services “has fluctuated but shown no clear trend.”
Meanwhile, food prices rose 0.5%, little changed from the 0.6% increase seen in October. Four of the six major grocery store food group increased over the month.
Tuesday’s key inflation report – perhaps the last major economic release of 2022 – also comes as the Federal Reserve kicks off its final meeting of the year. On Wednesday, members of the policy-setting Federal Open Market Committee (FOMC) are poised to lift interest rates by 50 basis points, a slowdown from the 0.75% increases delivered over the past four meetings.
Lighter than expected inflation data is unlikely to stop officials from raising their benchmark policy rate by the projected 0.50% at the end of their meeting or proceed with another estimated 75 basis points worth of hikes in the new year. But it may affirm recent signals by policymakers that indicate a slowdown in the pace of increases.
“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,” Seema Shah, chief global strategist at Principal Asset Management said in emailed comments.
“Yet, Powell will likely maintain an element of caution in his comments tomorrow,” Shah added, pointing to wage inflation from a continuously strong labor market that still poses a problem for Fed officials.
November’s jobs report released earlier this month saw non-farm payrolls rise by 263,000, bringing the three-month average to a robust 272,000 and revising away the moderation in average hourly earnings. The labor force participation rate fell to 62.1%, suggesting a substantial amount of job openings remain — a factor that continues to put upward pressure on wages.
“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.” Shah said.
(This post is breaking. Please check back for updates.)
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Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc
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