November US inflation numbers come in slightly hotter than expected

Today’s CPI numbers from the US came in a little hotter than expected for November, with both the headline and core monthly rates posting 0.1% gains on last month’s reading. The numbers very much underline the somewhat bumpy road CPI is going to take to get back to target and reinforce what we have already heard from various officials, namely that the last 2% reduction in CPI to target was going to be the hardest.

The 0.29% increase in the monthly core rate left the annual rate unchanged at 4%, a level that the Fed will see as providing no real cause for celebration. But more positively, it brought the 3mth/3mth annualised rate down to 3.3% which will allow the Fed to claim that inflationary pressures are still abating. The biggest contribution to the monthly core increase came from shelter costs, which rose by 0.5% on the month. However, the numbers are somewhat erratic on a monthly basis and therefore it is entirely plausible that the December reading will be lower. Overall, core services prices ex-rents – the Fed’s current preferred measure of inflation – rose by 0.5%, much too high, and particularly when annualised. The Fed will take some comfort from the fact that the core PCE version of pricing pressures is based on PPI prices rather than CPI, and this means they can diverge away from each other on a monthly basis. Accordingly, despite the 4% headline core CPI reading today, the forthcoming PCE number (released on 22nd December) may yet come in softer.

The core goods number fell by 0.3%, and this despite an unexpected 1.6% rise in used car prices, declines seen across nearly all other categories of goods. On a 3mth/3mth annualised basis, core goods inflation is now running at -2.9%. But this will not be sufficient for the Fed to relax its stance. Services inflation remains too high still, and the implication of last week’s employment report is that underlying upwards pricing pressure stemming from the labour market remains robust. Wages account for around 80% of service company costs and until the Fed is convinced a material weakening in the labour market is underway it will not change its current stance.

In summary therefore, although the Fed has probably tightened enough in this cycle, today’s numbers, and particularly when viewed in light of last week’s employment report, lay the ground for this week’s FOMC meeting to deliver the now familiar message that a further rate rise remains on the table, should it be needed. For Powell, a core CPI rate of 4% is still too high and the FOMC will want to be certain that pricing pressures are on a sustainable downwards path before contemplating any relaxation in policy. Accordingly, he will likely be keen tomorrow to push back against growing market expectations of a near term policy easing and will almost certainly try to avoid making any comments on when the first rate cut might be seen. But the market will read into today’s report what it wants to read, and its reaction so far suggests that it is being seen as a dovish set of figures. But if you discount the natural tendency for markets to over-react, put both the employment report and inflation numbers together and it probably point to a first cut coming in Q2 rather than Q1.