The last inflation report before year-end cemented market expectations of another Fed rate cut at the December 18 meeting. This had long been our view, even as doubts grew around its likelihood following the election results.
This is not to say that this was a “nothing to see here” type of report. There remain persistent inflationary pressures in some corners of the economy and the outlook has also become more inflationary given policy ideas (we would not call them proposals just yet) put forth by the incoming republican administration. But timing matters. If those policies impact the Fed path, they will do so in 2025. In fact, our forecasts have already adjusted to reflect the combination of positive data revisions (pre-election) and policy impulse (post-election); we now only expect three Fed rate cuts next year versus five previously. Importantly, we perceive risks to that call to be two-sided: amid inflation worries, let’s not forget about the softening labor market.
Now, back to the November inflation data. Overall prices rose 0.3% m/m as expected, but an upward revision to October lifted the headline inflation rate by a tenth to 2.7% y/y. Core prices also increased 0.3% (also as expected), leaving the core inflation rate at 3.3% where it has been sitting since September. Food played a big role in November, helping to lift goods prices 0.4% m/m. Food prices rose 0.4% m/m, with food at home up an outsized 0.5%, the most since January 2023. Increases within this space were reasonably broad-based, though the surge in egg prices may not be sustained. Motor vehicles were another source of goods inflation, with new vehicle prices up 0.6% m/m and used vehicles up 2.0% m/m. Car auction data had signaled gains here, but that correction has largely played out by now.
Services brought good news, with services inflation up 0.3%. Shelter prices increased 0.3% as a whole, but rent of primary residence increased just 0.2% m/m, the least since April 2021. Hotel prices surged 3.2%, the most since October 2022 and, prior to that, July 2021. We see this as a one-off hit and look for some relief next month. Motor vehicle insurance, which had been a hot spot for inflationary pressures this year, appears to be normalizing. Following a 0.1% m/m decline in October, prices rose a tepid 0.1% in November. The inflation rate for this category has eased from April’s peak of 22.6% to 12.7% y/y in November. Recreation services inflation is also cooling: events admission inflation has cooled from 9.1% in May to under 2.0%.
All in all, this was a report that argued vigilance, not panic, on inflation.
