U.S. November Consumer Price Index: Inflation continues to abate

REAL ECONOMY BLOG | December 12, 2023

Authored by RSM US LLP

Inflation continued to abate in November as energy prices declined by 2.3% and gasoline prices dropped by 6%, resulting in a 0.1% monthly advance in the Consumer Price Index and a 3.1% annual increase.

Over the past three months, the decline in top-line inflation implies that the overall rate is heading toward the Federal Reserve’s target of 2%, while core inflation, which excludes the more volatile food and energy categories, continues to fall to a range just above 3%.

One result of declining inflation has been a rise in workers’ real wages after accounting for inflation. Real average hourly earnings increased by 0.8% in November and can be expected to climb further in the coming months, which bodes well for the consumption outlook.

The internals of November’s CPI report all point to a further easing in the pace of inflation. That decline is aligned with our expectations of top-line pricing easing toward 2.5% later next year.

In addition, this softening in price increases is slowly creating the conditions where the Federal Reserve can cut rates from its currently restrictive stance of 5.25% to 5.5%.

Our interest rate forecast for next year implies that the Fed will begin reducing the policy rate around midyear. We expect four 25 basis-point cuts in the policy rate in the second half of next year, reaching 3% in 2025, which we think is the neutral rate in this post-pandemic era.

Policy implications

The underlying trend in inflation is undeniably moving in favor of the Federal Reserve, which is done hiking rates.

The disinflation across the energy and goods sector should continue to provide relief to policymakers who will soon pivot to rate cuts to support the current economic expansion.

In addition, the easing in shelter costs will drag down top-line inflation next year, which will set the predicate for those rate cuts.

The data

Disinflation continued to be the major narrative in November’s data as the cost of transportation declined by 0.6% on the month while new vehicle prices fell by 0.1%. Airline fares dropped by 0.4%, apparel costs dropped by 1.3%, recreation costs declined by 0.2% and education and communications costs fell by 0.3%.

While used vehicle costs increased by 1.6% on the month, that was the result of the United Auto Workers strike, which ended last month. We would urge policymakers and investors to look through that increase, and we anticipate that as production ramps back up, those prices will continue to move down as the Manheim Used Vehicle Value Index implies.

The cost of housing in the CPI continues to lag the easing in rents showing up in real-time data. In November, housing costs increased by 0.4% on a monthly basis, and by 5.2% on a year-ago basis. Shelter prices increased by 0.4% and 6.5%, while the policy-sensitive owner’s equivalent rent series advanced by 0.5% and 6.7%.

But we expect these prices to meaningfully ease next year—there is a lag of close to one year between what happens in the real economy and what we observe in the Consumer Price Index. For example, the Cleveland Federal Reserve’s New Tenant Rent Index, a more accurate gauge of real-time data, points to a 2.7% increase in rents in contrast to the higher levels seen in the current CPI data.

Food and beverage costs increased by 0.2% and advanced by 2.9%, while medical care costs increased by 0.6% in November and were up by 0.2% from a year ago.

The meats, poultry, fish, and eggs index decreased by 0.2% in November as the indexes for pork, chicken and beef all declined.

The takeaway

We expect inflation costs to ease further as the softening in rents is captured in the Consumer Price Index, and as the disinflation in the goods sector and easing demand for services in the first half of the year contribute to an improved inflation outlook.

This data will add to the growing chorus calling for a Fed rate cut. At this time, the market is pricing in 100 basis points of rate cuts next year, which is in line with the RSM forecast that expects those cuts to start around June.