Inflation cooled for a second straight month in November and by far more than economists were expecting, helping to bolster the case that our current period of fast-rising prices (opens in new tab) might be receding into the past.
The Consumer Price Index rose just 0.1% last month (opens in new tab) vs. a 0.4% gain in October, the Bureau of Labor Statistics reported Tuesday. Economists forecast prices to rise 0.3% month-over-month, according to a survey by Bloomberg (opens in new tab). Year-over-year, prices increased 7.1% last month, which was the smallest 12-month increase since the period ending December 2021. Economists were looking for a jump of 7.3%.
Excluding volatile food and energy prices from the equation likewise supports the argument that peak inflation (opens in new tab) is now behind us. So-called core CPI rose 0.2% in November after rising 0.3% in October. Economists projected month-over-month core prices to gain 0.3%. Year-over-year, core CPI increased by 6% vs a forecast of 6.1%.
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As we noted in our November report (opens in new tab) preview, a nasty upside surprise in inflation had the potential to send stocks into a tizzy. Happily, the opposite came to pass. Markets jumped (opens in new tab) on the CPI report, with the blue-chip Dow Jones Industrial Average, broader S&P 500 and tech-heavy Nasdaq Composite all gapping up sharply at Tuesday’s opening bell.
The inflation data comes just a day before the Federal Reserve makes its last policy decision of 2022. The central bank is expected to raise the federal funds rate by 50 basis points, or 0.5%, on Wednesday, which would represent a significant slowdown from an unprecedented string of 75 basis point hikes. Although today’s CPI print wasn’t expected to change the central bank’s calculus, the data could very well prompt the Fed to adopt even smaller interest rate (opens in new tab) hikes in future meetings, experts say.
To get a sense of what today’s inflation report means for monetary policy, markets and macroeconomics, we’ve compiled a selection of commentary from economists, strategists and other market pros on the last CPI release of 2022.
“This morning’s CPI report adds to the case that inflation has peaked, and importantly, overall services inflation continues to slow. This won’t alter the Fed’s 50 basis point hike coming tomorrow but increases the likelihood of another step-down in the pace of hikes at the February meeting to 25 basis points. It also reduces the upside surprise potential in the Fed’s updated ‘dot plot’ of projections for the Fed funds rate. However, broad inflation and wage gains are still running well above levels consistent with the Fed’s 2% target, necessitating an extended period of restrictive monetary policy.” – Jeff Hibbeler, director of portfolio management and senior portfolio manager at Exencial Wealth Advisors (opens in new tab)”Inflation is behind us. The question now is whether or not the Fed will follow the data into slowing and stopping rate hikes. CPI prints like this do not a wage-price spiral make.” – Jamie Cox, managing partner at Harris Financial Group (opens in new tab)”While continued pressures in the sticky/labor-intensive components are still a concern, they were more than offset by deflation in the goods economy. This will be the dynamic to watch moving forward. Headline CPI was also below expectations. U.S. inflation has likely peaked but now must find out whether it will be sticky on the way down. Overall, this print should create visibility that the Fed will hike only 25 basis points in February (after 50 basis points tomorrow) which further slows the hiking campaign. A peak rate in either February or March is becoming more likely. Better visibility on the peak rate is good for risky assets (multiples) but doesn’t change the view that the yield curve should maintain its inversion if not invert further. We assume it will take more proof that inflation is indeed coming down quickly and the more likely scenario is that the Fed will stay at peak for the remainder of 2023 unless the economy weakens a lot.” – John Luke Tyner, fixed income analyst at Aptus Capital Advisors (opens in new tab) “We continue to believe that inflation will remain stubbornly high and above the Fed’s 2% target in 2023. Even with consecutive 0.1% month-over-month core-inflation prints next year, this doesn’t put us at the Fed’s year-over-year inflation target until late 2023 or early 2024. What hints does this CPI print provide in thinking about tomorrow’s FOMC decision as well as potential policy shifts in 2023? A 0.5% rate hike is almost certain for tomorrow, especially after Chair Powell’s recent speech at the Brookings Institution (opens in new tab), where he cited that now might be the time to slow the pace of rate hikes. Since inflation continues to remain elevated and recession risks (opens in new tab) are becoming clearer, we expect Chair Powell to provide a hawkish press conference to reign-in equity prices and push back on the rate cuts priced in for late 2023. Next year, we think the Fed will settle at a terminal rate of around 5% and keep policy rates higher for longer.” – Gargi Chaudhuri, head of iShares Investment Strategy, Americas (opens in new tab)”Santa is coming after all. Given the better-than-expected inflation data this morning, with the year-over-year number coming in lower than expected and the month-over-month number slowing considerably, markets have a green light to rally into year-end. In addition to more room for the Fed to operate in (because of the lower inflation reading), investors have been positioned so bearishly (opens in new tab) that there is going to be a rush to cover shorts and the bulls will press their advantage. 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?” – Chris Zaccarelli, chief investment officer at Independent Advisor Alliance (opens in new tab)”The equity and Treasury market alike are applauding the CPI report, which is clearly indicating that inflation has peaked and is edging lower at a faster-than-expected pace. While the Fed still has to ‘keep at it,’ its job is becoming easier as demand has begun to soften in the face of higher prices. This report should offer Chairman Powell the opportunity to acknowledge that finally inflation has plateaued, if not fully peaked.” – Quincy Krosby, chief global strategist at LPL Financial (opens in new tab)”Inflation is easing and the Fed is on track to downshift the pace of rate increases. We expect the Fed to increase the fed funds rate by 0.5% at the upcoming meeting. The November deflator will be released on Dec. 23, which will also play a role in the expected path of rate hikes. Most importantly, the Fed will release updated projections on the 14th which will likely include upward revisions to both next year’s inflation rate as well as the peak fed funds rate. However, in the near term, investors should respond favorably to these encouraging moves in consumer prices.” – Jeffrey Roach, chief economist at LPL Financial “The slowdown in inflation broadened in November to encompass a wider range of goods and services. Inflation was terrible in 2022, but the outlook for 2023 is much better. Supply chains are working better, business inventories are higher, ending most of the shortages that fueled inflation in 2020. The surge in energy prices (opens in new tab) has unwound a bit in recent months, and food prices edged slightly lower in November, too. A weakening economy is cooling inflation, too. Comerica forecasts for year-over-year inflation to slow to under 5% by the spring of next year. With the Fed likely to raise their benchmark interest rate by half a percent this week, then probably by a quarter percent at the following two meetings, the Fed’s short-term interest rate will probably be above CPI inflation by then. That will probably be enough for the Fed to pause their rate hike cycle with the federal funds rate target at a range of 4.75% to 5.0%. If inflation continues to fall, the Fed will probably be able to start reducing interest rates in the fall of 2023.” – Bill Adams, chief economist at Comerica Bank (opens in new tab)”Just in the nick of time, the Santa Claus rally seems to have begun this morning with today’s CPI report which was cooler than expected. Both equities and fixed income markets are soaring on the news. While this is the second consecutive month of softer-than-expected inflation, we don’t think this will change anything at tomorrow’s Fed meeting. We still expect a 50 basis points hike but what matters is guidance. Powell now has tough choices, and the Fed has its job cut out for them as they balance taming inflation in a tight labor market. While today’s numbers show a good trend, investors shouldn’t overreact. The last time the market rallied over softer inflation data, we experienced the Jackson hole jolt, where Powell pushed back and reiterated hikes. Guidance is pivotal because the markets are pricing in rate cuts. Markets expect the fed funds rate to get to 5% but the market doesn’t expect it to stay there.” – Gina Bolvin, president of Bolvin Wealth Management Group (opens in new tab)”While Tuesday’s report showed a deceleration in inflation, which is great news, inflation is still very elevated and is over three times greater than the Fed’s 2% target, so this isn’t time for the Fed to take a victory lap. While it is certainly possible that we have now passed peak inflation, if we keep up this pace of decline, price increases will continue at levels that are still very painful for consumers. Tuesday’s number won’t likely change anything for the Federal Reserve ahead of its meeting this week, as its decision was likely made weeks ago. The Fed is facing a tricky dynamic in 2023, as the market is expecting the Fed to end its hiking cycle, and the Fed certainly wants to end its hikes early in 2023 before any significant economic damage occurs, but there is a possibility that inflation continues to run much higher than its 2% target even after it stops raising interest rates.” – Nancy Davis, founder of Quadratic Capital Management (opens in new tab) and portfolio manager of the Quadratic Interest Rate Volatility and Inflation Hedge Exchange-Traded Fund (IVOL (opens in new tab))”The subdued November CPI report fully paves the way for the Fed to scale back the pace of rate hikes tomorrow (to 50 basis points). And, assuming further moderation ahead, provides more confidence that the Fed may only need to tap the brakes lightly in the new year to cap this tightening cycle. If so, it will go some ways to increasing the odds of a soft landing. With the bulk of the policy effects to hit home next year, we still see a shallow downturn, but the better inflation news of late greatly reduces the chances of a more severe outcome.” – Sal Guatieri, senior economist at BMO Capital Markets (opens in new tab) “Based on the massive reaction to the CPI data, it is clear that the markets were fearing another hot inflation number. But instead of the expected, the headline inflation rate receded. This affords Powell to sound less hawkish tomorrow, that much is for sure – but the damage has been done already as far as the economic outlook for 2023 is concerned.” – David Rosenberg, founder and president of Rosenberg Research (opens in new tab)”Today’s CPI report offers further evidence that core inflation is slowing and that the peak in inflation this cycle is behind us. A directionally slower but still elevated core inflation rate argues for a directionally slower but still aggressive monetary policy response, and that is what we expect from the FOMC tomorrow. A 50 basis point rate hike is all but assured, and such a move would be a step down from the 75 basis point pace that marked the previous four FOMC meetings. That said, a core inflation rate of 4.3% over the past three months is still roughly double the Fed’s 2% target. Furthermore, not all sources of deflationary pressure will be sustained on a permanent basis. Our expectation for tomorrow is still that the FOMC will signal that there is still work left to be done in the fight against above-target inflation.” – Sarah House, senior economist at Wells Fargo Economics (opens in new tab)”What the November CPI report showed is that this is no longer a ‘one datapoint doesn’t make a trend’ story and that inflation is now on a clear disinflation trajectory. This disinflationary trajectory will probably cement itself in the coming quarters as we expect shelter prices (opens in new tab), which represent about a third of the weight on the CPI index, to start weakening. This CPI report will not change this week’s Federal Reserve (Fed) decision to increase the federal funds rate by 50 basis points, but it may help keep the Fed from over-tightening monetary policy. We remain in the camp that the Fed will end its tightening campaign at 5.0% for the terminal fed funds rate during this cycle, but we will have more confirmation about this once the Fed ends this week’s Federal Open Market Committee meeting on Wednesday.” – Eugenio Alemán, chief economist at Raymond James (opens in new tab)”All eyes are now on the Fed’s interest rate decision tomorrow afternoon. With a tamer inflation rate known, traders have baked in a high 80% chance of a 50-basis-point rate hike, up from a 73% probability yesterday. The all-important terminal rate inched down to about 4.85% from 4.98%, according to the futures market. While this morning’s CPI data is positive news, Powell will likely keep his hawkish tone Wednesday afternoon, but be on the lookout for comments from the Fed.” – Brian Overby, senior markets strategist at Ally Invest (opens in new tab)