A key measure of U.S. consumer prices posted its smallest monthly gain in more than a year in November, suggesting the country may have passed the worst of its inflation, fueling an expected Fed slowing rate hikes pace More supporting evidence is provided.
Labor Department reported on Tuesday that the consumer price index (CPI), excluding food and energy, rose 0.2% month-on-month and climbed 6% year-on-year. Economists believe the core CPI measure reflects underlying inflation better than the headline index.
Headline CPI rose 0.1% MoM and 7.1% YoY as lower energy prices helped offset higher food prices. "This is not an outlier. In fact, today's report shows a fairly broad slowdown in price growth," Omair Sharif, founder of
Inflation Insights LLC, said in a note.
The S&P 500 opened sharply higher and US Treasury yields plummeted after the report. Economists surveyed by Bloomberg had previously expected that the core and overall CPI would both rise by 0.3% month-on-month.
This is the last CPI report for 2022. Although the data shows that inflation is still too high, the rate of price increase is moderating. While the Fed is likely to welcome the pullback and may consider a pause in rate hikes early next year, Chairman Jerome Powell has previously highlighted the central bank's commitment to getting inflation back to target and uncertainty over the outlook.
Economists generally expect price growth to slow significantly next year, but it is unclear how much more bumps or pains the economy will experience on the way to return inflation to target.
The Federal Reserve will wrap up its two-day policy meeting on Wednesday and is expected to announce a 50 basis point rate hike. Although this rate increase is expected to be smaller than the past four meetings, the interest rate will reach the highest level since 2007 after the rate hike.
Economists expect the Fed to pause for some time next year after raising interest rates several times to assess the trajectory and persistence of inflation. Market participants expect the Federal Reserve to cut interest rates before the end of next year. The cost of living, the largest services sector segment of the CPI, rose 0.6 percent last month, the smallest gain in four months, as hotel prices fell. Housing prices were "by far the biggest driver of overall CPI growth," the report said.
Core commodity prices fell for a second straight month in November, down 0.5%. Services prices, which exclude energy, rose 0.4 percent, the slowest increase since July. According to
's calculations, after deducting energy, house rent and owner's equivalent rent, service prices decelerate significantly. Powell recently emphasized the importance of this indicator in gauging trends in the core personal consumption expenditures price index (PCE). He called this probably "the most important category for understanding the future evolution of core inflation".
Focus on services
With economists widely expecting core commodity inflation to continue to slow and residential price indices to eventually turn next year, the focus is increasingly turning to core services to gauge the path of headline price pressures. Wage levels and the broader labor market are expected to be a key factor influencing the trajectory of inflation going forward, given that compensation expenditures represent a sizeable share of service provider costs. "We can still see a lot of signs of a pullback in inflation, but the question is does that get inflation back to 3 percent? How do we get it from 3 percent to 2 percent?" said Matthew Luzzetti, chief U.S. economist at Deutsche Bank %, which is the part that I think is more difficult".
So far, the labor market has been cooling slowly but remains very strong. Employers in most industries continued to increase employment and raise wages. Businesses are often reluctant to lay off workers amid a dwindling workforce and millions of jobs remain unfilled across the economy.