Disinflationary Progress Stalls

This morning, the CPI rose 0.3% in November, as expected and an uptick from a 0.2% increase in October. Year-over-year, consumer prices rose 2.7%, also as expected and an acceleration from the 2.6% annual increase the month prior. At 2.7%, this marks the largest annual increase in four months and the second consecutive month of acceleration from the previous month’s pace.

Food prices rose 0.4% and energy prices increased 0.2% in November following no change the month prior. Excluding food and energy costs, the core CPI rose 0.3% in November for the fourth consecutive month, as expected. Year-over-year, the core CPI increased 3.3% for the third consecutive month.

In the details of the report, transportation prices rose 0.4%, due to a 2.0% gain in used cars and truck prices, a 0.6% rise in new vehicle prices, and a 0.4% increase in airline fares. Meanwhile, other goods and services costs climbed 0.5%, and shelter prices rose 0.3% with a 0.2% gain in the OER in November, down from the 0.4% rise in October. Also, commodities prices increased 0.4%, and medical care prices rose 0.3% in November, as did recreation prices. Additionally, apparel prices gained 0.2% in November, the largest monthly increase in two months.

On the other hand, education and communication prices fell 0.4% in November, the second consecutive month of decline.

Another iteration of inflation, the supercore – defined as core services excluding housing – rose 0.3% in November following a similar rise the month prior. Over the past 12 months, the supercore increased 4.3%, down from the 4.4% annual increase in October and marking the smallest annual gain in two months.

Tomorrow, the PPI is expected to rise 0.3% in November and 2.7% over the past 12 months, also a potential uptick from a 2.4% pace reported in October. The core PPI, meanwhile, is expected to rise 0.2% in November and 3.2% on an annual basis, posting a potential minimal increase from the 3.1% pace reported in October. 

Bottom Line: Disinflationary progress continues to show signs of stalling with the headline accelerating in November, while the core continues to trend sideways now for the third consecutive month. The headline backup, however, was minimal as well as in line with expectations, perpetuating expectations for a third-round rate cut next week. That being said, while not enough to dissuade the Fed from further action near term, looking out to 2025, an ongoing lack of progress should imply a policy pivot sooner than later, particularly given downside risks to labor market conditions have “decreased.” After all, adjusting rates too low or too fast runs up the risk of reigniting inflationary pressures and potentially reversing progress already made.

Aside from expectations for another 25bp cut at year-end, with persistently solid data, particularly in the labor market, the Committee is likely to maintain a relatively hawkish tone and positive assessment of current conditions in the December statement. Additionally, given the ongoing “hot” reads on inflation exceeding earlier Fed predictions, the Committee is likely to materially revise its forecast for additional policy adjustments over the next 24 months, resulting in a reduced number of cuts and a notably higher r*.

After initially moving higher earlier this morning, the 10-year has fallen 5bps to 4.20% as of 9:45 a.m. ET.

Also, this morning, MBA mortgage applications rose 5.4% in the week ending December 6 following a 2.8% gain the month prior. Meanwhile, the 30-year mortgage rate fell 2bps to 6.69%, the lowest since mid-October.

In international news, the Organization of the Petroleum Exporting Countries (OPEC) cut its demand outlook for the fifth consecutive month, slashing projections for this year and 2025. The report shows a guidance reduction by nearly 30% to 1.6 million b/d. 

Crude prices are trading up 0.9% at $69.23 a barrel as of this morning, however, still down 3% from the start of the year.

Wrapping up the week, on Friday, the November import and export price indices will be released. 

-Lindsey Piegza, Ph.D., Chief Economist