US Core Inflation Slows, Giving Fed Some Breathing Room On Rates

(Bloomberg) -- A key gauge of US consumer prices posted the smallest monthly advance in more than a year, indicating the worst of inflation has likely passed and validating an anticipated slowing in the pace of Federal Reserve interest-rate hikes.

Excluding food and energy, the consumer price index rose 0.2% in November and was up 6% from a year earlier, according to a Labor Department report Tuesday. Economists see the gauge — known as the core CPI — as a better indicator of underlying inflation than the headline measure.

The overall CPI increased 0.1% from the prior month and was up 7.1% from a year earlier, as lower energy prices helped offset rising food costs.

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“This is not an outlier. In fact, today’s report showed a fairly broad-based slowdown,” Omair Sharif, founder of Inflation Insights LLC, said in a note.

The S&P 500 surged at the open and Treasury yields plummeted following the report. The median estimates in a Bloomberg survey of economists called for 0.3% monthly increases in both the core and overall measures.

The report, the last of 2022, points to inflation that — while much too high — is beginning to ease. While the Fed will likely welcome the deceleration and could consider pausing hikes early next year, Chair Jerome Powell has emphasized both the central bank’s commitment to returning inflation to the central bank’s goal and the uncertainty of the outlook.

Economists broadly expect annual price growth to slow substantially next year, but it’s unclear just how bumpy or painful the path back to the central bank’s target will be.

The Fed concludes its two-day policy meeting on Wednesday and is expected to announce a half-point interest rate increase. While that would be a smaller hike than implemented in the last four meetings, it would put rates at the highest level since 2007. 

What Bloomberg Economics Says...

“The surprisingly soft November CPI print adds to the case that disinflation is building...By the late-January FOMC meeting, some Fed officials may conclude there’s enough ‘compelling’ evidence to start talking about pausing rate hikes.”

- Anna Wong and Eliza Winger, economists

For the full note, click here

Economists expect further tightening next year followed by an extended pause as policymakers assess the nation’s inflation trajectory and persistence. Market participants see the central bank cutting rates before the end of next year. 

Shelter costs — which are the biggest services’ component and make up about a third of the overall CPI index — increased 0.6% last month, the smallest advance in four months as hotel rates declined. The report showed shelter was “by far the largest contributor” to the overall CPI gain.

While rents increased 0.8% and owners’ equivalent rent rose 0.7%, the cost of lodging away from home sank 0.7% after surging the prior month. Though private-sector data point to a stabilization in rents in a range of cities across the country, there’s a lag between real-time changes and when those are reflected in Labor Department data.

Core goods prices fell for a second month in November, dropping 0.5%. Excluding energy, services prices climbed 0.4%, the smallest gain since July. 

Stripping out energy, rent and owners’ equivalent rent, services prices decelerated notably, according to Bloomberg calculations. Powell recently emphasized the importance of this type of measure when it comes to assessing the path of a separate gauge of inflation — the core personal consumption expenditures price index. 

He called it perhaps “the most important category for understanding the future evolution of core inflation.”

Services Focus

With economists widely expecting continued moderation in core goods inflation and an eventual turn in the housing gauges next year, focus is increasingly shifting to core services to judge the path of overall price pressures. Given compensation makes up a notable share of costs for service providers, wages and the broader labor market are expected to be a major determinant in the nation’s inflation trajectory.

“We can still see a lot of disinflation, but the question is does that get us simply from where we are to 3%? How do we get from 3% to 2%, and that’s I think the more difficult part,” Matthew Luzzetti, US chief economist at Deutsche Bank AG, said on Bloomberg TV.

So far, the labor market, while slowly cooling, remains extremely strong. Employers in most sectors continue to add jobs and raise wages. Businesses are generally reluctant to lay off workers amid a shrinking pool of available workers, and there are still millions of unfilled positions across the economy.

The resilience of the labor market, in addition to pent-up savings, has underpinned demand and contributed to concerns that the Fed will have to step harder on the policy brakes to tame inflation. Others cite job-market strength as evidence the central bank may be able to slow inflation without sparking a recession or a surge in unemployment.

A separate report Tuesday showed inflation-adjusted average hourly earnings increased 0.5% in November from a month earlier, but were down 1.9% from a year ago.

--With assistance from , and .

(Adds Bloommberg economists’ comment, market open)

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