US: Core inflation slows, giving the Fed some room to ease on interest rates

Headline CPI increased by 0.1% (expected: 0.3%) compared to the previous month and by 7.1% (expected: 7.3%) compared to the previous year. The consumer price index excluding food and energy (core), which is seen a better indicator of inflation than the headline data, increased by 0.2% (expected: 0.3%) in November and by 6% (expected: 6.1%) compared to the previous year.  In the period including the post-Covid period in the core indicator, the lowest monthly reading after August 2021 was taken. Lower energy prices in the low headline CPI helped offset rising food costs.

If we look at the sub-items; Core goods prices also fell in the second month, down 0.5% in November. Used car prices fell by 2.9% in the fifth month, while clothing costs rose 0.2%. Energy prices fell 1.6%, reflecting declines in gasoline, electricity and utilities. Food prices rose 0.5%. Airfares fell 3% month-on-month after falling 1.1% in October.

Housing costs, the largest services component and accounting for about a third of the overall CPI index, rose 0.6% last month, the smallest in four months, as hotel prices fell. The report showed that the housing item made "by far the largest contribution" to the overall CPI increase. Rents increased by 0.8% and owners' equivalent rent increased by 0.7%, while the cost of staying away from home decreased by 0.7% compared to the previous month. While private sector data point to a stability in rents in various cities across the country, there is a lag between real-time changes and their reflection in Department of Labor data.

With the exception of “energy, rent and the equivalent rent of owners”, which Powell highlighted as a separate inflation indicator and described as “the most important category for understanding the future development of core inflation”, services prices slowed significantly compared to the indicator. Services prices excluding energy recorded the lowest increase since July with 0.4%. Medical care services declined in the largest recorded decline, a dynamic that is expected to continue largely into next year.

US Core Inflation Cools… Progress was at its lowest in more than a year… Source: Bloomberg, Bureau of Labor Statistics

November data indicate that although inflation is still very high, it is in the process of decreasing. We see that the prices of goods are now in the process of disinflation, and the decline in core services should also be sustained in order to confirm the continuity of the general inflation decline. That's why the trend in PCE is so important. We will probably understand the first signs of this with the deterioration in the labor data, the main factor will be the results of the Fed's tightening policy, its reflection on the labor market and naturally on the demand level. Such a trend will be perceived positively as both a decrease in the fear of stagflation and an indication that the results of the Fed's policies have begun to be reaped, and will support the view that the central bank's rate hikes are approaching their destination. Overall, annual price growth will slow significantly next year, but it's unclear how bumpy or painful the path to the central bank's goal will be.

If we look at the Fed's point of view; ceiling interest rate expectation decreased to 4.88% above the terminal. Tomorrow, the Fed is expected to announce a half-point rate hike. While this is a smaller increase than has been implemented in the last four meetings, it will put rates to the highest level since 2007. Of course, the level of interest rates will manifest in the form of further tightening and a pause for a while in terms of the anti-inflation campaign. However, another phenomenon that the easing inflation will support is the possibility of rate cuts before the end of 2023. Because policy makers will think more and more that cumulative tightening is working. Chairman Jerome Powell has stressed both his commitment to return inflation to the Fed's target and the uncertainty of the outlook, so the Fed will welcome a slowdown in inflation.

: Tera Yatırım-Enver Erkan