U.S. Consumer Price Index (November 2023)

Price gains across still-hot service sector keep upward pressure on core inflation in November

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• The Consumer Price Index (CPI) rose 0.1% month-on-month (m/m) in November, a tick above the consensus forecast and a modest uptick from October. On a twelve-month basis, headline inflation slipped to 3.1% (from 3.2%).

  • Energy prices were a key factor restraining the headline measure, falling 2.1% m/m. The pullback was entirely due to another drop in gasoline prices (-5.8% m/m). Food prices added upward pressure to inflation on a monthly basis (+0.2% m/m), but at 2.9% year-on-year (y/y), are no longer providing the same lift to headline inflation that they were last year.

• Core inflation (excludes the direct effects of food & energy prices), rose 0.3% m/m, an acceleration from last month's 0.2% m/m gain, but in line with expectations. On a twelve-month basis, core inflation held steady at 4%.

• Shelter costs remained a key factor keeping services costs elevated in November, rising 0.45% m/m, as rent of primary residence held steady at 0.5% m/m, while owners' equivalent rent accelerated to 0.5% m/m (from 0.4% in October).

  • Non-housing services (aka the CPI measure of 'supercore') also accelerated in November, rising 0.5% m/m (from 0.2% m/m in October).

• Core goods prices surprised to the downside, falling by 0.3% m/m – a sharper decline than October's 0.1% m/m pullback. Unlike months prior, where the declines have largely been concentrated in used vehicle prices, the pullback in November was spread across several categories including recreation commodities (-2.6% m/m), apparel (-1.3% m/m), household furnishings (-0.7% m/m), and new vehicle prices (-0.1% m/m).

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• Core inflation accelerated in November, as an uptick in both shelter costs and non-housing services (aka 'supercore') more than offset the pullback in goods prices. With both the three-and-six-month annualized rates of change (at 3.4% and 2.9%, respectively) on core running below the twelve-month change, we should see a further cooling in inflationary pressures in the months ahead. However, with price pressures on the service side of the economy remaining very sticky, the final descent to 2% is likely to come with some turbulence.

• All eyes now shift to the Fed's interest rate announcement on Wednesday. While it's widely expected that FOMC will hold rates steady for the third consecutive meeting, Chair Powell is likely to push back on the recent pull-forward in rate cut expectations. With the next leg lower on inflation to evolve more slowly, and the labor market still tight by historical standards, the FOMC will likely need to keep the policy rate at today's restrictive levels through the first half of next year.