Dive Brief:
- The Consumer Price Index (CPI) in November rose at the slowest pace in 15 months, validating plans by the Federal Reserve to trim the increase in the federal funds rate on Wednesday to a half point after four consecutive 0.75 percentage point hikes.
- The CPI last month gained 7.1% from a year ago, less than forecast and significantly down from 7.7% in October, the Labor Department said Tuesday. On a monthly basis, the CPI rose 0.1% in November compared with 0.4% the prior month.
- “Disinflationary pressure has been visible in the pipeline for some time, but now it is emerging where it counts — in the consumer data,” Pantheon Macroeconomics Chief Economist Ian Shepherdson said, predicting a half point increase in the main interest rate on Wednesday. During a post-meeting press conference, Fed Chair Jerome “Powell’s tone will be less aggressively hawkish than in November, and his more dovish colleagues will likely be emboldened by this report.”
Dive Insight:
Fed officials began a two-day policy meeting on Tuesday following the recent release of data, in addition to the CPI report, showing that price pressures have eased.
The Producer Price Index, a measure of what suppliers charge, rose 7.4% in November from a year earlier after increasing 8.1% in October and 11.7% in March, according to the Labor Department.
Consumer expectations for inflation also fell last month for the one- and three-year time horizons, the New York Fed said on Monday. Consumers expect inflation to slow to 5.2% in 12 months and 3% in three years, or 0.7 percentage point and 0.1 percentage point less than forecast in October.
The Fed’s preferred gauge of inflation — the core personal consumption expenditures price index excluding volatile food and energy prices — likely rose just 0.1% last month compared with 0.2% in October and 0.5% in September, Shepherdson said in a note. He predicted that the Fed will complete its tightening with a quarter point increase of the main interest rate on Feb. 1.
The Fed has sought to curb the highest inflation in nearly 40 years with its most aggressive policy tightening since the 1980s. The central bank, aiming to bring down inflation to its 2% target, has raised the main interest rate 3.75 percentage points this year.
Powell has said in recent weeks that policymakers will probably increase the benchmark interest rate more early next year than they forecast at their gathering in September, when most officials projected that the main rate would rise to between 4.5% and 5%. It currently is at a range of 3.75% to 4%.
“It seems to me likely that the ultimate level of rates will need to be somewhat higher than thought at the time of the September meeting,” Powell said on November 30.
“It is likely that restoring price stability will require holding policy at a restrictive level for sometime,” he said, adding “history cautions strongly against prematurely loosening policy.”
Powell and other policymakers have recently expressed concern that high inflation may spark wage growth and kindle a further increase in prices.
Average hourly earnings adjusted for inflation rose 0.5% last month compared with October but fell 1.9% compared with November 2021, the Labor Department said Tuesday.
The decline in real wages — and the fact that for months job openings have far exceeded the number of people looking for work — suggest that wage pressures may push up inflation.
“We think that wage increases are probably going to be a very important part of the story going forward,” especially in services, Powell said in reply to a question on Nov. 30. “We want wages to go up strongly, but they have to go up at a level that is consistent with 2% inflation over time.”
“At what point do people start saying, ‘I need higher wages because, you know, my real wages are going down,’” Powell said. “We don't really know when that point is — but when you get to that point, you're in serious trouble.”
