On December 11, the Labor Department reported that the Consumer Price Index (CPI) increased 0.1% after being unchanged in October.
Michael Pearce, Lead US Economist for Oxford Economics, offered this analysis.
- Another sharp drop in gasoline prices last month kept headline CPI inflation on a downward trend but core inflationary pressures remain more stubborn, with core inflation unchanged at 4%. With underlying inflation set to trend lower only gradually next year, we expect Fed officials to push back hard on market expectations that rate cuts could come as soon as spring.
- A 6% fall in gasoline prices helped limit the rise in overall consumer prices to 0.1% in November, and with crude oil prices falling further in December amid record US oil production, gas prices look set to continue their decline in the near-term.
- By contrast, the downward momentum in core inflation evident in recent months has stalled. Core prices rose by 0.3%, leaving core inflation at 4%, the first time since March that the annual core inflation rate has failed to decline. Core goods prices continued to decline last month, driven by the broad easing of supply chain pressures and easing demand for goods, which pushed clothing, furniture and toy prices lower. Used vehicle prices rose 1.6% m/m, but that should prove to be a blip in the disinflationary trend.
- The less encouraging news was the 0.5% rise in core services prices. Shelter remains stubbornly high, with prices rising by 0.4%. Rents and owner-equivalent rents rose at a similar pace to September and October, rather than continuing to ease as we and most others had anticipated based on the trends in rents on new leases. Excluding shelter there were continued strong gains in transport services prices, reflecting the previous surge in vehicle prices and an increase in accidents, and medical care services, which will continue to boost inflation over the next year.
- Overall, this will do little to change the Fed's recent communications that core inflation remains too strong to contemplate shifting to rate cuts any time soon. Market expectations of rate cuts early next year are likely to be disappointed. We see more stubborn wage and core inflation pressures keeping the Fed on prolonged hold, with cuts likely to be delayed until September.
