Inflation Cools Slightly in November, Costs for Food, Gas and Shelter Remain High

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Inflation continued to cool down in November, easing up to 7.1%, which is even lower than economists had anticipated. The decline provides some hope and relief to both investors and consumers. The decrease was mostly driven by a decline in gas prices, but the still-high figure was driven largely by an increase in shelter prices, the Bureau of Labor Statistics (BLS) said Tuesday, Dec. 13.

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This is also a 0.1% increase for the month, following the 0.4% increase in October, and represents the second consecutive time the 12-month figure was below 8% since February, when it stood at 7.9%, according to BLS data.

Economists expected the CPI to increase at an annual pace of 7.3% and a 0.3% monthly increase, according to Dow Jones.

“We expect the market to respond positively to November’s below-expectation CPI print as we reach the end of 2022. While inflation is still high relative to target, and may remain high well into 2023, this slowed growth rate is a positive indication of the Fed’s progress in taming inflation,” said Ben Vaske, investment research analyst at Orion Advisor Solutions.

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Core CPI — which excludes food and energy — increased 0.2% for the month and 6% on an annual basis, BLS data shows.

Energy and Gas

In November, the energy index declined 1.6%, bringing the annual increase to 13.1%. Meanwhile, the gasoline index also declined 2%, but still shows a 10.1% annual increase.

“Today’s CPI report is an indication that inflation is slowing. Reductions in prices are led by oil, which is at a year-low at $71-72. While the prices of food, rent, and labor increased, we know that there is a lag period that exists in these sectors,” said John Catsimatidis, chairman and CEO of Red Apple Group — which owns and operates United Oil Refinery and 400 gas stations — as well as chairman and CEO of Gristedes & D’Agostino’s Supermarkets.

Catsimatidis believes that a responsible approach for the Fed to take would be to pause further interest rate increases because continued increases would have a greater adverse impact on other industries.

“The economy is still reacting to previous rate increases, as well as other economic factors, and the Fed should consider letting things sort themselves out without creating a bigger problem for other industries,” he said.

Food

The overall food index increased by 0.5%, with the food at home and food away from home indexes each up 0.5% for the month. Inflation rates on food have seen a 12% increase over the last 12 months.

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Food categories that increased for the month include the index for fruits and vegetables, which rose 1.4% and the index for cereals and bakery products rose 1.1%.  

In contrast, the index for meats, poultry, fish, and eggs fell 0.2% over the month; the beef index fell 0.8% over the month, while the pork index fell 0.3%.

“Today’s inflation report may be the data point that singularly confirms the turn in the battle against inflation,” said  Jeffrey Rosenkranz, portfolio manager, Shelton Capital Management. “While we aren’t all the way back to a 2% target, this should give all of us confidence that eventually we will get there.  The Fed may try to keep a lid on financial conditions with talk about the battle not being over, or the labor market still being uncomfortably tight, but markets won’t likely hear any of it tomorrow.”

On the other hand, the shelter index continued to increase, rising 0.6% over the month, and was the dominant factor in the monthly increase in the Core CPI. This brings it to 7.1% over the last year, accounting for nearly half of the total increase in the Core CPI.

In addition, the BLS said that the rent index rose 0.8% over the month.

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Some of the indexes which declined over the month include the index for used cars and trucks, which fell 2.9% in November, the fifth consecutive decline in that index and the index for airline fares, which fell 3% over the month.

“Though inflationary pressures remain elevated, freight rates have fallen significantly to pre-pandemic levels. We expect reduced transportation costs to be critical for CPI to drop gradually in the first half of 2023 as production and logistics costs decrease and are passed onto the consumer, especially in retail, consumer electronics, and building materials,” said Damien Stile, CEO of shipping and logistics, import/export company Alba Wheels Up International. 

What Does It Mean For 2023?

Experts are responding to the latest data with cautious optimism, awaiting the Federal Reserve’s decision on Dec. 14, and trying to gauge how all these economic indicators will carry into the new year.

“This was the Hail Mary needed to see that seasonal tailwind, for a year-end rally. We expect the fed to raise by 50bps, so tomorrow shouldn’t throw us off. The caveat to pull back on this rally is if the Fed comes out with continuous hawkish rhetoric,” Sylvia Jablonski, CEO and CIO, Defiance ETFs. “Today’s number is giving the market a reason to spike in the short term. The biggest issue long term is where will inflation moderate, but the good news is we can get a nice year-end pop and perhaps stability in the markets going into the new year.”

The sentiment was echoed by several experts, who are pondering whether this might be the beginning of the end for inflation.

“Santa is coming after all,” said Chris Zaccarelli, CIO for Independent Advisor Alliance. “The short-term moves seem obvious, but the bigger question for 2023 will be whether or not the Fed will need to go higher than expected in order to bring inflation back down to 2% (or possibly even 3%) as bringing inflation from 9% to 7% has already been accomplished, but how easy will it be to get all the way back down to normal levels?

What Does It Mean for Consumers?

For some experts, while the report is encouraging, we’re not out of the woods yet, which means that consumers might have to suffer for a bit longer.

Ted Rossman, senior industry analyst at Creditcards. Com for example, said that even at a lower-than-expected 7.1%, the year-over-year increase is still substantial.

“I think that’s a key piece for consumers to understand – we’re not expecting prices to come down broadly, perhaps in a few categories, but not overall,” he said.  “Inflation is sticky in this sense.”

Rossman added that the prices for many goods and services will continue to build, albeit hopefully at a slower rate.

“And while the Fed is likely to slow the pace of its interest rate hikes from 75 basis points to 50 when they announce their decision tomorrow, we’re already seeing record-high credit card rates and the highest mortgage and car loan rates in more than a decade,” he said.

Rossman also added that there are still ample recession risks on the table and a higher unemployment rate is likely.

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“Today’s report certainly beats the alternative though. If inflation were not coming down, the Fed would have much bigger problems on its hands, considering that would have been seen as evidence that its substantial interest rate hikes were not working. The medicine does seem to be working, but the patient is not cured yet,” he said.

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About the Author

Yaël Bizouati-Kennedy is a full-time financial journalist and has written for several publications, including Dow Jones, The Financial Times Group, Bloomberg and Business Insider. She also worked as a vice president/senior content writer for major NYC-based financial companies, including New York Life and MSCI. Yaël is now freelancing and most recently, she co-authored  the book “Blockchain for Medical Research: Accelerating Trust in Healthcare,” with Dr. Sean Manion. (CRC Press, April 2020) She holds two master’s degrees, including one in Journalism from New York University and one in Russian Studies from Université Toulouse-Jean Jaurès, France.
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