Fed plays whack-a-mole with inflation

Core CPI rose at 3.3% from a year ago…still well above the Federal Reserve’s target of 2%.

Food and prices at the gas pump accelerated during the month after decelerating earlier in the year. Four of six major food groups saw an acceleration in inflation. Overall, the consumer price index (CPI) rose 0.3% in November, up a tick from the 0.2% pace of October. That translates to 2.7% on a year-over-year basis, up from 2.6% in October.  

Some of the increases reflect external shocks, such as the bird flu which continues to wreak havoc on the stock of chickens, eggs and other proteins. It has shown up in unpasteurized milk and livestock as well as other proteins. Eggs alone increased 8.2% in price last month and surged 37.5% from a year ago. That is the fastest annual pace in almost two years, when prices soared 70% at the start of 2023. Beef prices accelerated more than 3% in November. The result has been a rise in food insecurity among low-income households, according to the recent pulse surveys by the Census Bureau.  

Energy prices rose after falling in previous months. Prices at the gas pump edged up a bit last month. Temperatures plunged across much of the country which boosted energy demand. OPEC + decided to keep production cuts in place against the backdrop of weak global demand for oil. Its goal is to buoy oil prices amidst weakness in Asia and Europe. Recent dollar appreciation has made oil, which is sold in dollars, more expensive for many of our trading partners. The break-even for new oil wells is much higher than that for existing oil wells in the US; that is currently constraining investment in the sector. Deregulation will remove some of those hurdles but is not likely to spur the level of investment some hope.  

Core CPI, which strips out the volatile food and energy components, matched the 0.3% pace of overall inflation and that of the previous month. Core CPI rose at 3.3% from a year ago, the same as last month, and still well above the Federal Reserve’s target of 2%.  

Shelter costs, which had been stubbornly high, showed signs of finally decelerating on the heels of a slowdown in home values and an easing in rents. Rents and owners’ equivalent rent rose only 0.2% during the month, the slowest pace since March 2021 when the economy started to really reopen. Outliers showed up in housing at school and hotel room rates. Hotel rooms alone soared 3.7% during the month, on the heels of demand triggered by the loss in housing due to hurricanes, added to another record holiday travel season. 

New and used vehicle prices, which had finally shown signs of cooling, picked up. Replacement demand triggered by storms and the scramble by consumers to buy ahead of future price hikes accounted for the increases. Hoarding can become its own self-fulfilling prophecy because it amplifies price hikes and underscores how much more prone to external shocks inflation is today compared to pre-pandemic. 

Core services, which strip out shelter costs, rose 0.1%, the slowest pace since August. Year-over-year measures cooled to a 4.1% pace in November, down from 4.5% in October. That is welcome news. Financial markets are all in on a quarter point rate cut from the Federal Reserve, although the decision is still closer to a flip of a coin than many imagine. Containing inflation has become a game of whack-a-mole, while estimates for the neutral or noninflationary rate post-pandemic have moved higher.  

Bottom line:

The CPI data came in warm and mixed. The good news is that one of the primary drivers of inflation is abating; that is shelter costs. Core services appear to have cooled but are still running well above the pace last year and pre-pandemic. Debate over whether to cut rates a final time in December or take a breather will be heated. If the Fed cuts by a quarter point at its meeting next week, then it will do so while signaling a major pause at the start of the year.