CPI in line with expectations; How will it impact the Fed?
The November Consumer Price Index (CPI) report showed inflation picking up modestly, with headline CPI rising 0.3% month-over-month (MoM) and 2.7% year-over-year (YoY). Core CPI, which excludes volatile food and energy categories, also increased by 0.3% MoM and held steady at 3.3% YoY. Both headline and core CPI results matched economist expectations, signaling persistent but moderated inflationary pressures. The report underscores that while inflation has eased significantly from its 2022 highs, certain price pressures remain sticky.
The monthly inflation increase was driven primarily by higher shelter costs (+0.3%), which contributed nearly 40% of the overall rise. Food prices climbed 0.4%, led by notable jumps in categories like eggs (+8.2%) and nonalcoholic beverages (+1.5%). Used car prices rebounded (+2.0%), while medical care rose 0.3%, maintaining its upward trend. Energy prices inched up 0.2%, with natural gas rising (+1.0%) and electricity falling (-0.4%). These trends highlight the ongoing contribution of essential goods and services to inflationary pressures.
Sticky inflation components, such as shelter and medical services, continued to show resilience. Shelter prices, which include rent and owners’ equivalent rent, rose by 0.3% MoM but showed smaller increases compared to earlier months in 2023. While these components remain elevated, the deceleration in growth suggests some relief may be on the horizon. Persistent inflation in essential services, however, underscores the challenges the Federal Reserve faces in achieving its 2% target.
Broadly, the data suggest a gradual normalization of inflation after years of volatility. Core goods inflation appears stable, with notable price movements in used vehicles (+2.0%) signaling potential volatility in consumer discretionary categories. Energy inflation has eased YoY, with gasoline prices down 8.1% and fuel oil prices dropping 19.5%. Food prices, although elevated, are showing more stability, with the cereals and bakery products index seeing its largest one-month decline (-1.1%) since its inception in 1989.
The report aligns with recent data showing strong consumer confidence, buoyed by a robust labor market. Wage growth held steady at 4% YoY in November, supporting consumer spending. Optimism among businesses has also improved, with metrics like the NFIB Small Business Optimism Index reaching its highest level since mid-2021. These dynamics suggest that while inflation pressures persist, economic resilience remains a key factor in shaping inflation expectations.
The November CPI results provide little reason for the Federal Reserve to deviate from its anticipated 25-basis-point rate cut in December. The report’s consistency with expectations reinforces the Fed’s view that inflation is on a gradual downward trajectory. However, the persistence of shelter inflation and the labor market's strength could lead the Fed to signal a pause in additional rate cuts in early 2024 to ensure inflation continues to ease toward its target.
Financial markets reacted positively to the CPI report, with U.S. stock futures edging higher following the release. The results alleviated concerns of a reacceleration in inflation and reinforced expectations of an imminent Fed rate cut. Bond markets showed little movement, with Treasury yields steady to slightly higher, reflecting the market’s alignment with the Fed’s projected policy path.
Overall, the November CPI report reflects a bumpy but steady path toward inflation normalization. Persistent price pressures in certain categories like shelter and medical care remain concerns, but improving business sentiment and stable wage growth point to a resilient economy. Looking ahead, the Fed’s policy decisions will be critical in managing inflation expectations and sustaining economic growth. Markets will continue to monitor upcoming economic data, including December’s CPI report, to assess the sustainability of these inflationary trends and their broader implications.