Prices increased 7.1% over the year—this was the smallest 12-month increase since the period ending December 2021—and 0.3% over the month, beating the expectations. The report comes right before the FOMC meeting in which the FED will announce the last rate hikes for 2022. Earlier this month, the FED signaled that it would start tapering as early as tomorrow given the recent softening in the labor market. And today’s report suggests that the FED is likely to go with a 50 bps rate hike since core inflation—the part of inflation that the FED watches most closely—has been flat for two consecutive months and lower than expected.
In recent months, the main contributor to inflation has been price increases in services, which are fueled by strong consumer spending on services. The services price index went up 0.3% over the month, and 7.2% over the year, and accounted for almost 4% of the 7.1% overall inflation rate. A decrease in household savings will likely weaken consumer spending after the holidays and gradually reverse the upward trend in service prices.
- Core inflation is the good news in today’s report: Core inflation is the less volatile part of inflation that tells us the long-term direction of the overall prices. And it is the number that the FED pays very close attention to when they are deciding the magnitude of the rate hikes. Core inflation has been easing for the last two months, increasing only 0.2% over the month, and 0.4% on average for the last 3 months at an annualized rate of 4.4%—significantly slower than the annualized rate of 6.0% during the prior 3 months. A deceleration in core inflation is great news as it signals that the downward trend of overall inflation rate is likely not to be reversed.
- The high cost of housing is a key reason inflation isn’t slowing further. Despite a negative reading of -0.5% in core commodity prices, inflation remains high largely due to elevated shelter prices. The 0.6% increase in shelter prices was more than enough to offset deflation in core commodities. That said, real time data on market rents from sources like Zillow and Apartment List shows a large decline in rent growth in recent months, which is likely to pass through into official data soon.
- Real earnings increased 5 months in a row. Thanks to a low overall month-over-month inflation rate of 0.1% and strong nominal wage growth of 0.6%, the purchasing power of workers’ paychecks increased 0.5% in November. Real average hourly earnings for all employees have increased or held steady for the last 5 months since July. Although this is good news for employees, high wage growth is a concern for the Fed since it is more than double of the rates that are consistent with the Fed’s 2% inflation rate target.
- Inflation expectations are well anchored. Both the New York Fed inflation expectations survey, and the ZipRecruiter job seeker confidence survey signal that inflation expectations have decreased sharply since the summer. This is especially promising since persistently elevated inflation expectations often signal a wage price spiral and make it difficult for the FED to stabilize prices in the long-term.
