Inflation rose 7.1% year-on-year from last year, less than expected

Inflation slowed again last month, more than expected, as the Federal Reserve raised interest rates at the fastest pace in decades.

The Consumer Price Index (CPI) in November showed a 7.1 percent increase from last year and a 0.1 percent increase from the month, the Bureau of Labor Statistics said Tuesday. Economists had expected prices to rise 7.3% year-on-year and 0.3% month-on-month, according to Bloomberg data.

On a “core” basis, which strips out the volatile food and energy components of the report, prices rose 6.0% year-on-year and 0.2% in November. Consensus estimates called for a 6.1% annual increase and a 0.3% monthly increase in core CPI.

The report set in motion US stocks ahead and sent Treasury yields lower as Wall Street weighed the implications of the Federal Reserve’s softer policy footprint. S&P 500 futures rose 2.8%, while Dow Jones Industrial Average futures jumped more than 700 points. Nasdaq futures jumped 3.8%.

Although November’s data showed a moderate slowdown in inflation, the costs of essential items and housing faced by US consumers still remain stubbornly high and well above the Federal Reserve’s long-term target for price stability of 2%.

The Federal Reserve is keeping a closer eye on “core” inflation, which offers policymakers a more nuanced look at inputs like housing. The core CPI figure, by contrast, has largely changed in tandem with volatile energy prices this year.

The energy index fell 1.6% for the month after rising 1.8% in October. The downshift was due in part to a 2% drop in the measure’s gasoline category after gasoline prices rose 4% in October.

Although falling energy prices led to lower overall inflation last month, the CPI shelter category – which accounts for 30% of the overall CPI and 40% of the core reading – was the dominant driver of the monthly increase across all items and more than offset the declines in energy indices. Shelter spending rose 7.1 percent over the past year, accounting for nearly half of the overall increase in the core CPI, the Bureau of Labor Statistics said.

“Housing costs have a unique, symbiotic relationship with inflation,” Bright MLS Chief Economist Lisa Sturtevant said in a note.

In a speech at the Brooking Institution in Washington last month, Federal Reserve Chairman Jerome Powell emphasized that housing inflation has risen rapidly, while inflation in other core services “has been fluctuating but showing no clear trend.”

WASHINGTON, DC – NOVEMBER 30: US Federal Reserve Chairman Jerome Powell speaks at the Brookings Institution. (Photo by Drew Angerer/Getty Images)

Meanwhile, food prices rose 0.5%, little changed from the 0.6% increase seen in October. Four of the six major food groups in grocery stores increased during the month.

Elsewhere in the release, the index for used cars and trucks fell 2.9%, the fifth straight decline for that component of the report. Medical care spending also fell 0.5% in November, the same percentage decline seen in October.

In contrast, indices for communication, recreation, motor vehicle insurance, education and clothing were among the aspects of the report that saw gains.

Tuesday’s key inflation report — perhaps the last major economic announcement of 2022 — also comes as the Federal Reserve kicks off its final meeting of the year. On Wednesday, members of the policy-setting Federal Open Market Committee (FOMC) are ready to raise interest rates by 50 basis pointswhich is a slowdown from the 0.75% gains achieved in the last four meetings.

The lighter-than-expected inflation data is unlikely to prevent officials from raising their benchmark interest rate by the 0.50 percent they forecast at the end of their meeting or following through with another 75 basis point hikes in the new year. But it could confirm recent signals from policymakers that the pace of increases is slowing.

“Another inflation surprise not only confirms the Fed’s decision to slow the pace of rate hikes, but also raises hopes that the inflationary surge may actually be tamed over the next 12 months,” said Seema Shah, chief global strategist at Principal Asset Management in email comments.

“Still, Powell is likely to retain an element of caution in his comments tomorrow,” Shah added, pointing to wage inflation from a continued strong labor market that still poses a concern for Fed officials.

The November jobs report released earlier this month saw nonfarm payrolls increase by 263,000, bringing the three-month average to a steady 272,000 and revising the moderation in average hourly earnings. The labor force participation rate fell to 62.1%, suggesting significant job vacancies remain, a factor that continues to put upward pressure on wages.

“The difference between 5% inflation and 3% inflation next year lies in the Fed’s ability to further slow the labor market, which likely requires additional monetary tightening and absolutely no rate cuts,” Shah said.

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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