November’s consumer prices show “disinflation,” but reaching acceptable levels could mean more pain
One-two punch… It’s a big week for markets, with back-to-back economic headliner events. Today the Fed meets on rate hikes, and its decision will likely be informed by yesterday’s inflation report. US consumer prices were up 7.1% in November from last year (vs. 7.3% expected). The pace of inflation slowed again from 7.7% in October, showing “disinflation.”
- Disinflation: Like a balloon that’s getting more inflated, but at a less noticeable pace. Prices are rising — just not as fast as they were in previous months.
- Deflation: Like a balloon that’s losing air — aka: not what’s happening now. Deflation is a broad drop in prices and can signal an economic downturn.
- Expectation: Investors celebrated the report because it raises the likelihood that the Fed will hike rates by 50 basis points today (vs. another 75 bps hike, as we had the past four times).
Potato-potahto… While food prices continued ticking up, price growth has slowed since July (potatoes led the charge, with prices falling a spudtacular 8.4% in November). Meanwhile, the energy index fell 1.6% for the month as gas and electricity prices dropped, contributing to disinflation (oil prices are actually down for the year). But housing and rent prices canceled out the energy cooldown, accounting for nearly half the total increase in core inflation. We’re not out of the inflated woods just yet.
Pausing ≠ reducing… While disinflation is happening, inflation’s still abnormally high (energy prices alone are still up 13% from last November). That’s why the Fed’s expected to keep hiking into the new year, though less aggressively. Even if Fed Chair Powell pauses hikes early next year, high interest levels could stick around until the Fed sees a meaningful cooldown in growth. And it could be a while before the Fed actually starts cutting.