November inflation data, rising by 6.8% on the year, offered no relief for American households as energy and transportation costs continued to drive prices higher.
We expect inflation to approach 7.3% early next year before costs start their long descent back toward 2%.
While there is some relief over the horizon on both fronts—falling oil and gasoline prices, as well as the return of North American auto production—investors and policymakers are turning their attention to the housing channel, where costs are advancing at a 4.8% annual pace.
It’s through that channel where a possible wage price spiral could start and in our estimation is why policymakers at the Federal Reserve have changed their tone, text, and policy direction around inflation.
The overall Consumer Price Index climbed by 6.8% on a year-ago basis in November, and by 0.8% on the month, as inflation continued to broaden out. We expect this to continue until early next year, when we expect inflation to approach 7.3% before costs start their long descent back toward 2%.
Inside the core index, excluding food and energy, prices increased by 4.9% from a year ago, and by 0.5% on the month. Excluding food, costs on a year-ago basis increased by 6.9% and by 5.1% excluding energy. Excluding food, energy and shelter, costs were up by 5.7% annually.
Although the energy component accounts for only 7.5% of the total index, it was responsible for 33% of the increase on the month.
Policymakers and investors should anticipate volatility in prices because of still-snarled supply chains, falling oil prices and the traditional two-month lag in gasoline prices that will affect inflation and consumer confidence in the coming months.
That means that firms can expect neither vice nor virtue inside the inflation data. Expect large moves in both directions over the next year that will make investment and allocation decisions for firms more difficult. For this reason, we have pulled forward our expectation of the first Fed Reserve rate hike to June with the chance that it could occur in March.
From a policy perspective, the November inflation data means little and that is because the Federal Reserve has already signaled it will most likely accelerate its pace of tapering monthly bond purchase from the current $15 billion to the anticipated $30 billion when it meets on Dec. 15.
At that meeting, the only thing that may surprise the market is a change in the Fed’s forward guidance around permitting the balance sheet to fall on its own accord, which some will call quantitative tightening and result in long-term rates at the 30-year maturity spectrum to rise and create the conditions for a steepening of the yield curve.
The housing question
That is why we think attention among policymakers and investors will now turn to housing costs. Overall housing costs rose by 4.8% on a year-ago basis, and by 0.5% on the month. Shelter costs advanced by 0.5% on the month and were up by 3.8% annually.
Rent of primary residence climbed by 0.4% on the month and by 3.5% from a year ago. Our preferred metric inside this channel is the owners equivalent rent series, which climbed by 0.4% for the third straight month, up by 4.8%.
Energy costs rose by 3.5% in November, energy commodities by 5.9%, fuel oil by 3.5%, motor fuel by 6.1% and gasoline prices by 3.9%. Energy services were up by 3.3%, electricity costs by 3.3% and utility gas costs by 0.8%, all on the month.
High prices in energy and commodities, which in the past year were the primary drivers of higher costs, have already started to ease. Unfortunately, as the adage goes, the solution to higher prices inside the energy and commodity complex is higher prices.
That wait, for balance to return to the market, offers little solace to households bearing the burden of rising costs or policymakers whose solution on commodities and snarled supply chains is patience and waiting out the lagged impact of the rate hikes on the way.
Food prices increased by 0.7% on the month and were up by 6.1% from a year ago. Food at home is up by 6.4%; cereals by 4.6%; meat, poultry and eggs by 12.8%; dairy by 1.6%; and fruits and vegetables by 4%.
Education costs were flat on the month, medical care climbed by 0.2% while new vehicles increased by 1.1%. The costs of used vehicles jumped by 2.5%. Recreation costs declined by 0.2%.