Consumer price inflation increased by 0.1% month-on-month (m/m) in November, coming in well below the 0.4% m/m increase in October. On a year-over-year (y/y) basis, headline inflation edged lower by 0.6 percentage points (pp) from the month prior, slowing to 7.1%.
Energy prices fell by 1.6% m/m, as both gasoline prices (-2.0% m/m) and energy services (-1.1% m/m) were lower on the month. Food prices rose 0.5% m/m (following a slightly larger 0.6% gain in October), and are up 10.6% y/y.
Core inflation (excludes food & energy) rose 0.2% m/m – slightly below the consensus forecast which called for a gain of 0.3% m/m. Relative to last October, the core measure is up 6.0% – down 0.3pp from October’s reading of 6.3% y/y and 0.7pp below the peak y/y reading seen back in September.
Price growth across core services (+0.4% m/m) was a tenth of a percentage point lower than in October. Shelter costs (0.6% m/m) were again a meaningful contributor – accounting for nearly half of the annual increase in headline inflation – with rent of primary residence (+0.8% m/m) and owner’s equivalent rent (+0.7% m/m) each notching sizeable gains. Lodging away from home fell 0.7% m/m.
- Other service categories including recreational (+1.0% m/m), education & communication (+1.0% m/m) and other personal services (+0.8% m/m) also rose on the month. Meanwhile, price growth across medical (-0.7%% m/m) and transportation (-0.1% m/m) services were lower in November.
Core goods prices declined for the second consecutive month, falling by 0.5% m/m. Declines were concentrated in used vehicle prices (-2.9% m/m), recreational commodities (-0.4% m/m) and apparel (-0.5% m/m). New vehicle prices were flat on the month.
Key Implications
Inflationary pressures continue to ease from their summer highs, with the three-month (annualized) reading on the core measure having steadily declined in each of the last five months and currently sits at 4.3%. While goods prices appear to have peaked, some of the more labor-intensive service sectors continue to emanate relatively strong price growth. Until we see a cooling in labor market conditions, these sectors alongside persistent strength in the shelter component, will continue to exert upward pressure on inflation.
Medical care services have recorded sizeable declines in each of the last two months. On the surface, this is seeming like an encouraging development. However, the recent pullback can largely be traced back to a methodological quirk. The Bureau of Labor Statistics uses changes in the industry’s retained earnings from the year prior to project expected costs in the subsequent year. As a result, any decline in medical care costs over the coming months is more to do with weaker 2021 earnings rather than contemporaneous disinflationary pressure, which means policymakers will need to look through any easing in inflation attributed to falling medical care costs.
Despite inflationary pressures showing some promising signs of cooling, the year-ago measure of core inflation continues to run at a clip that’s roughly three-times the Fed’s 2% inflation target. While we suspect the time has come for the FOMC to begin dialing back on the pace rate hikes – with a 50-bp hike expected tomorrow – policymakers will need to see more conviction in the inflation data before calling it quits on this tightening cycle. For a complete overview of the U.S. economic outlook, please see our updated Quarterly Economic Forecast.
