Inflation Continues to Decline, Hitting 3.1% Rate in November

One day ahead of the Federal Reserve’s last meeting of 2023, consumer prices rose modestly in November but edged down on an annual basis to 3.1%.

The overall reading came in right around expectations and compares with October’s unchanged monthly number and annual rate of 3.2%. A continued rise in housing costs offset a 6% monthly decline in the price of gasoline, leading to a 0.1% increase in inflation for the month. Food prices rose 0.2% for the month, below the 0.3% increase in October.

The core index, stripping out energy and food costs, rose 0.3% for the month and 4% for the year, compared to 0.2% and 4% a month earlier.

The report will do little to change the minds of Federal Reserve policymakers, who are meeting to consider interest rates. They are overwhelmingly expected to leave rates unchanged when they announce their decision on Wednesday.

“As inflation abates real wages will rise and based on this data real average hourly earnings on a year ago basis are now up 0.8% and can be expected to climb further in coming months which bodes well for the consumption outlook,” Joe Brusuelas, chief economist at RSM US, said on social media following the report’s release.

Venkat Balakrishnan, head of asset allocation at Mission Square Retirement, says that “I think today the case for a soft landing is even stronger” than it was a few months ago.

Inflation has come down, the labor market is still creating a strong number of jobs even as wage growth is slowing, and corporate earnings are holding up, he says.

On Monday, the Federal Reserve Bank of New York’s survey of financial conditions found that consumers believe inflation will be 3.4% over the next year, down from 3.6% in October and the lowest level since April 2021.

And the latest Blue Chip Economic Indicators survey, also released on Monday, finds that while 73% of economists believe the economy will slow down sharply in 2024, 67% of them think the economy will not sink into recession over the next year.

The economists split on when the Fed might start cutting rates, with 17% expecting the first reduction coming in the first quarter and another 40% choosing the second quarter.

Balakrishnan acknowledges there is “uncertainty about how long the higher rates will remain.” In particular, when the Fed does begin to cut rates, it will be important why they are doing so, he says, whether it is because inflation is tame enough or whether it is because the economy is struggling.

“If they are concerned about the economy, then it’s a different story,” he adds.

But there are those who see darker clouds on the economic horizon.

“We are not in the soft landing camp,” says Cindy Beaulieu, chief investment officer of Conning North America. “Market participants are getting this wrong again. We don’t see room for 125-150 basis points of cuts next year.”

Fed Chairman Jerome Powell will have a chance to address that when he speaks to reporters on Wednesday following the conclusion of the central bank’s meeting. Powell is also likely to try to tamp down some of the recent market enthusiasm that has seen the S&P 500 reach a new 2023 high last week.

One question mark about Wednesday’s meeting will be Powell’s rhetoric during his press conference. “We expect him to communicate hawkishly by throwing cold water on the idea of rate cuts in 2024,” said George Ball, chairman of Sanders Morris Harris. “We expect interest rates to remain elevated for some time.”