Why America's inflation cooldown might be here to stay
There is more good news for an American consumer bedeviled by soaring prices, and policymakers racing to tame them: inflation slowed even further in November, the latest clue that the worst of it may be behind us.
The big picture: Similar optimism this summer was quickly crushed by subsequently higher inflation readings. But there are good reasons to believe this time really is different, with key inflation drivers — housing, goods and services — all pointing in a favorable direction.
Why it matters: The fate of the economy hangs largely on how inflation evolves. If it continues cooling without a drastic slowing of growth, a soft landing might be possible after all.
- The Fed's policy meeting is likely to conclude with a half-percentage point rate hike announced Wednesday afternoon.
- That's baked in, but the soft inflation data raises the odds that the central bank will conclude its rate-rising campaign at its next meeting seven weeks from now, perhaps with a mere quarter-point hike.
By the numbers: November's Consumer Price Index was up 7.1% over the last 12 months — the lowest since the end of 2021.
- Core CPI, which excludes volatile food and energy, has risen at a 4.2% annual rate over the last three months. That's well below the recent peak of 7.9% registered in the spring.
- Indeed, core prices rose only 0.2% in November, the lowest since August 2021. That works out to a 2.4% annual rate, which is consistent with the Fed's inflation target.
Details: Prices for physical goods are firmly in deflationary territory, a reversal of pandemic shortages.
- Vehicles were a poster-child. Prices of used cars and trucks have declined for five consecutive months, and are down 3.3% in the 12 months that ended in November.
- Goods with plunging prices also include furniture and bedding (-0.8% in November), laundry equipment (-2.7%) and tools and hardware (-0.8%).
There are positive trends in the services side of the economy, too — where consumers are increasingly shifting spending.
- Shelter costs, a critical driver of inflation, slowed last month. Private-sector readings, however, show rent prices are falling, which will feed through to the official CPI reading in the coming months.
- Price gains across other services, excluding shelter, were flat again. That's a sign that the strong labor market isn't yet causing prices to accelerate.
What they're saying: "Another downside inflation surprise not only validates a Fed decision to slow the pace of rate hikes, it also raises hopes that the inflation surge may actually be tamed within the next 12 months," Principal Asset Management's Seema Shah wrote in a note.
The bottom line: For the last 18 months, inflation has acted like the villain in a horror movie, re-appearing every time you think it might be dead.
- That could happen yet again — but November's CPI is the best evidence to date that the movie is finally near its end.