"Has the Worst Inflation Passed?" US Consumer Prices Slow... Fed's Pace Adjustment Gains Momentum (Summary)

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] The U.S. Consumer Price Index (CPI) slowed for the fifth consecutive month, recording the lowest monthly increase since the end of last year. This confirms another signal that the worst inflation peak may have passed. It also strengthens the case for the Federal Reserve's (Fed) pace adjustment.

◆ November CPI rises 7.1%... smallest increase since the end of last year

According to the U.S. Department of Labor on the 13th (local time), the November CPI rose 7.1% compared to the same month last year. This is the smallest increase since December last year and falls short of experts' forecast of 7.3%. The CPI increase, which surpassed 9% in June this year, has continued to slow down since then. The November CPI also rose 0.1% compared to the previous month, below the market expectation of 0.3%.

The core CPI, which excludes the volatile energy and food sectors, rose 6.0% year-over-year and 0.2% month-over-month. This also fell short of market expectations. The 0.2% month-over-month increase is the smallest since August 2021. Omar Sharif, founder of Inflation Insights, described the report as "showing a fairly broad-based slowdown."

By item, despite rising housing and food prices, the decline in energy prices significantly offset overall inflationary pressure. The energy price index in the CPI components fell 1.6% month-over-month, reflecting a 2% drop in gasoline prices. However, energy prices remain 13.1% higher than a year ago.

Housing costs, which account for about one-third of the total CPI, rose 7.1% year-over-year. Month-over-month, they increased 0.6%, slowing to the lowest level in the past four months. Food prices rose 10.6% year-over-year and 0.5% month-over-month, but the rate of increase slowed compared to October.

Additionally, prices for used cars, airfare, and medical services also showed a downward trend. Bloomberg reported, "The slowdown in service prices excluding energy, housing, and owner’s equivalent rent (OER) is clear." Service prices are the category Fed Chair Jerome Powell previously mentioned as "the most important category to understand the future direction of core prices" in the core Personal Consumption Expenditures (PCE) index.

◆ "Fed has more room to maneuver" possibility of a baby step next year

The CPI was released amid the two-day final Federal Open Market Committee (FOMC) meeting of the year starting on the same day. Regardless of the CPI, the market expects the Fed to take a 'big step' by raising the benchmark interest rate by 0.5 percentage points on the 14th, signaling a slowdown in tightening. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds (FF) futures market currently reflects more than a 79% chance of a 0.5 percentage point increase. This would set the U.S. benchmark interest rate at 4.25?4.50%.

With the inflation decline curve becoming clearer and the data falling short of market expectations, there is a growing consensus that the Fed has more justification to slow its pace. This means the Fed has more room to maneuver in its monetary policy operations. Following the December big step, there is also a possibility of a baby step (0.25 percentage point increase) at the next FOMC meeting in February next year. The probability of a baby step in February following the December big step has risen from the mid-30% range to the mid-50% range after the CPI release. Conversely, the chance of a big step in February has dropped by more than 10 percentage points.

Paul Ashworth, Chief North America Economist at Capital Economics, said, "The October CPI, which was below expectations, could be dismissed as a one-off data point, but with the November CPI further slowing, it is difficult to ignore this trend." Peter Cardillo, Chief Economist at Spartan Capital Securities, said, "Inflation is on a downward trend," and "The Fed will be less aggressive. After the 0.5 percentage point increase in December, it is more likely to raise rates by 0.25 percentage points starting in February next year."

The market is also awaiting the economic outlook, including inflation, which the Fed will release along with the rate decision on the 14th. Currently, experts expect inflation to stabilize further next year, citing simultaneous rate hikes by major countries to curb inflation, improvements in supply chain disruptions caused by COVID-19 and Russia's invasion of Ukraine. Recently, U.S. Treasury Secretary Janet Yellen said in a CBS interview, "If there are no unexpected shocks, inflation levels could be significantly lower by the end of next year."

However, variables that could fuel inflation remain, and despite passing the worst inflation phase, the level is still high compared to pre-pandemic times. The diagnosis is that a high inflation trend is inevitable for the time being. This is also why the market believes the Fed's pivot (direction change) may not be as easy as expected. Chair Powell is also expected to draw a line under pivot expectations at the press conference on the 14th, stating, "The fight against inflation is not over yet."

In the consumer outlook survey for November released by the New York Federal Reserve Bank the day before, expectations for future inflation showed a downward trend, but respondents indicated it would take at least five years to reach the Fed's target range of 2%. S&P Global also forecast in its 2023 economic outlook report that the high inflation trend will continue next year.

Meanwhile, the market cheered the inflation data that fell short of expectations. On the New York stock market that day, the three major indices all showed gains. As of 11:45 a.m. Eastern Time, the Nasdaq index, which is sensitive to interest rates and technology stocks, was trading about 1.7% higher than the previous session. Meanwhile, bond yields fell. The 10-year Treasury yield in the New York bond market slipped below the 3.5% level.

This content was produced with the assistance of AI translation services.