Prices rose a healthy 0.4% in November as reported by the headline consumer price index (CPI), which helped to lift total inflation slightly to 2.2% year-on-year, from 2.0% in October.
Three quarters of the price increase was due to energy prices, which rose 3.9% on the month, boosted by a 7.3% jump in the price of gasoline. The overall food index was unchanged for the second straight month in November.
The disappointing part came in core inflation, which only rose 0.1% in November. The year-on-year pace of core inflation slipped a tick to 1.7% in November from 1.8% in October. A 1.3% drop in apparel prices – the largest decrease since 1998 – was a notable weight on core inflation. Airline fares also fell 2.4% on the month. Elsewhere in core inflation, the weighty shelter component rose 0.2% m/m, a tick lower than October as prices for lodging away from home fell 1.3% in November after rising the previous three months.
The slight loss of core inflation momentum was felt in both goods and services. Core goods prices were back in deflationary territory (-0.1% m/m) and are down 0.9% versus a year ago, slightly less negative than the prior month. Core services rose 0.2% m/m, and are up 2.5% versus a year ago. Prices for medical care services were soft in November (-0.1% m/m) after a string of hotter readings.
Key Implications
We remain confident that conditions are ripe for inflation to build in the months ahead, although the process is proving lengthy. No doubt November’s inflation data is a setback. But, the sizeable decline in apparel prices is unlikely to be repeated next month, suggesting core inflation will firm once again in December. In an economy with unemployment at a 17-year low, and back-to-back quarters of 3% growth in real terms, conditions are ripe for increased pricing power. Adding to those healthy economic conditions, Congressional Republicans look set to pass a tax cut in the coming days. This will add further to inflationary pressures in 2018.
A rate hike at the FOMC meeting later today was essentially a lock, and November’s data isn’t weak enough to change that. However, it will provide some fodder for the doves on the FOMC to argue for a gradual pace of rate hikes in the coming quarters. As of the last meeting, the Fed expected to raise rates three times next year, but the “dots” will be watched closely later today to see if the Fed is tempering it’s optimism on the pace of rate hikes going forward.
