US core inflation slows, giving Fed Reserve some breathing room on rates

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 per cent in November and was up 6 per cent 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 per cent from the prior month and was up 7.1 per cent from a year earlier, as lower energy prices helped offset rising food costs.

US stock futures surged and Treasury yields plummeted following the report. The median estimates in a Bloomberg survey of economists called for 0.3 per cent 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, Chair Jerome Powell has emphasized both the central bank’s commitment to returning inflation to the Fed’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 could dismiss the better-than-expected October as just one month’s data, but the further slowdown in November makes this new disinflationary trend harder to dismiss,” Paul Ashworth, chief North America economist at Capital Economics, said in a note.

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. 

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 per cent 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 per cent and owners’ equivalent rent rose 0.7 per cent, the cost of lodging away from home sank 0.7 per cent 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 per cent. Excluding energy, services prices climbed 0.4 per cent, 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.”