The disinflation trend continued to stall in November, according to the most recent consumer price index data released on Wednesday.
November marked the first month since April when overall CPI inflation grew by 0.3% monthly, or 3.7% annualized, well above the Federal Reserve’s 2% target and a cause for concern.
Seasonal factors like the rebound in energy prices, higher used car prices and port strikes all contributed to the overall increase.
But there was no denying the signs of a reversal in the disinflation trend, driven largely by strong underlying growth, robust consumer spending and wage gains.
Hourly wage growth has now outpaced inflation for the 19th consecutive month on a year-ago basis. Core CPI inflation remained at 0.3% for the fourth consecutive month.
Top-line year-over year inflation rose to 2.7% while the core number stayed at 3.3%.
Does this mean the Fed should be on high alert regarding rate cuts at its meeting next week? It should, if the determination to bring inflation down to 2% outweighs the focus on maximum employment.
But we expect a more balanced approach from the Fed this time. By now, both the Fed and the market should have learned to avoid overreacting to monthly inflation volatility and instead maintain a medium- to long-term focus.
Twice in the past 12 months, the Fed’s reactions—or lack thereof—have spooked the market, leading to significant shifts in both market expectations and the Fed’s own predictions for interest rates.
Read more of RSM’s insights on the economy and the middle market.
In our estimates, the current run rate of inflation, estimated to be between 2.5% and 3% for closely watched personal consumption expenditures index, appears to be at a tolerable level.
We have long argued that demographic changes, reshoring and geopolitical concerns in the post-pandemic world will lead to a higher baseline for inflation.
When these factors are coupled with potential inflationary fiscal policies promised by the new administration, it is more likely than not that inflation will hover around this level, if not higher, for the foreseeable future.
This outlook suggests the Fed won’t deviate from cutting rates next week—a scenario priced in as the base case by the market.
We think this is a reasonable decision in the short term, given the possibility that seasonal factors may subside in the next few inflation reports.
In the longer term, we expect the Fed to slow its rate cuts to three or four next year, depending on how growth, labor and inflation evolve.
A scenario where the policy rate settles at 3.5% by the end of next year, with inflation remaining around 2.5% to 3% and solid growth and job gains, does not spell trouble by any means, in our opinion.
The data
Food and energy inflation rose faster in November, contributing to the overall increase in CPI number. Food rose by 0.4% while energy rose by 0.2% on the month.
Core goods prices also grew at a faster pace, rising by 0.2% after being unchanged in October.
Transportation commodities, led by used cars and trucks, were the main contributor of the gains in goods prices. Used cars and trucks increased by 2.0% monthly, following a 2.7% increase in October, mostly because of the two hurricanes.
Core service inflation remains at 0.3% in November. But there is good news within the increase as the two components that have contributed the most to the stickiness of inflation in the past couple of quarters—motor insurance and owners’ equivalent rent—moderated in November. Motor insurance increased by only 0.1% while the owners’ equivalent rent component was up by 0.2%, the lowest since 2021.
