Prices rose less than expected in November, the latest sign that the runaway inflation that has gripped the economy is beginning to ease.
The consumer price index, which measures a broad basket of goods and services, rose just 0.1% month-on-month and 7.1% year-on-year, the Labor Department reported on Tuesday. Economists polled by Dow Jones had expected a monthly increase of 0.3% and a 12-month rate of 7.3%.
While the year-on-year increase was well above the Federal Reserve’s 2% target for healthy inflation, it was also the lowest since November 2021.
Excluding volatile food and energy prices, the so-called core CPI rose 0.2% m/m and 6% y/y, compared to estimates of 0.3% and 6.1%, respectively.
Stocks initially surged higher after the report, with futures linked to the Dow Jones Industrial Average initially rising more than 800 points before shedding somewhat. However, the rally lost momentum sharply during the session, and the Dow was up about 50 points around 2:30 p.m. ET.
“A slowdown in inflation will boost markets and take the pressure off the Fed to raise rates, but most importantly, it means real relief for Americans whose finances have been penalized by higher prices,” said Robert Frick, a Navy business economist Federal Credit Union. “This is especially true for low-income Americans, who are disproportionately affected by inflation.”
Falling energy prices helped keep inflation in check. The energy index fell 1.6% for the month, in part due to a 2% drop in gasoline prices. However, food prices rose 0.5% and 10.6% year-on-year. Despite its monthly decline, the energy index was up 13.1% as of November 2021.
Housing costs, which account for about a third of the CPI weight, continued to escalate, rising 0.6% on the month and now 7.1% on an annualized basis.
Easing inflationary pressures helped boost workers after months of wage increases lagged far behind inflation. Real average hourly earnings rose 0.5% this month, although they are still down 1.9% yoy.
The CPI report comes on the same day that the rate-setting Federal Open Market Committee begins its two-day meeting. Markets are broadly expecting the FOMC to announce a 0.5 percentage point rate hike on Wednesday, regardless of Tuesday’s CPI reading.
“The Fed may dismiss better-than-expected October as just one month’s data, but the further slowdown in November makes it harder to dismiss this new disinflationary trend,” wrote Paul Ashworth, chief North American economist at Capital Economics, in a post-CPI -Note titled “Put a fork in, inflation is over.”
Inflation picked up in spring 2021, the result of converging factors that took price increases to the highest levels since the days of stagflation in the early 1980s. Key aggravating circumstances included a supply and demand imbalance caused by the pandemic, Russia’s invasion of Ukraine and its impact on energy prices, and trillions of dollars in fiscal and monetary stimulus that caused an abundance of money to go short caught goods chased into supply chain problems.
Used car prices, which were a major contributor to the initial surge in inflation, fell 2.9% over the month and are now 3.3% down year-on-year. As recently as February, the used car and truck index was up more than 40% on a yearly basis, driven by higher demand as a shortage of microchips led to a backlog in new car production.
Medical costs also decreased by 0.7% monthly and increased by 4.4% annually.
Headline CPI peaked at around 9% in June 2022 and has been slowly but steadily declining ever since.
After months of dismissing the surge in inflation as “temporary,” Federal Reserve officials began raising interest rates in March. The central bank hiked its short-term interest rate a total of six times, raising the benchmark to a target range of 3.75% to 4%.
Fed Chair Jerome Powell recently said that a key component in determining future monetary policy moves will be the inflation of services minus the cost of housing. That gauge was little changed in November, but is up almost 7.3% year-on-year.
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