A day before the Federal Reserve was set to make its last interest rate decision of the year, all signs pointed to inflation cooling down.
The U.S. Bureau of Labor Statistics’ Consumer Price Index (CPI) was released Tuesday ahead of the Federal Open Market Committee’s eighth and final meeting of 2023, indicating little change from October. The CPI increased 0.1% in November on a seasonally adjusted basis, after being unchanged in October, the agency reported.
First American Economist Ksenia Potapov called the new data on inflation “stable and in line with expectations” - giving the Fed reasons for ‘patience’ with further rate cuts.
“Goods inflation remained flat, while shelter inflation, which is included in services, continued decelerating on an annual basis. Shelter inflation remains significantly higher than pre-pandemic,” Potapov said.
Over the last 12 months ending in November the ‘all items’ index rose 3.1% before seasonal adjustment, while all items excluding food and energy rose 0.3% month over month and 4% year over year. The shelter index increased 0.4% after rising 0.3% in October. This offset a 6% decline in the gasoline index, while the energy index fell 2.3% over the month.
Economists expect the central bank to keep rates unchanged this week since the latest CPI data shows progress has been made in efforts to slow inflation.
"Inflation notched down to 3.1% in November despite the incomprehensible rise of nearly 7% growth in housing rent," National Association of Realtors (NAR) Chief Economist Lawrence Yun said. "Once rents decelerate into a more realistic 2% to 4% rise in upcoming months, no doubt due to the oversupply of new apartment units hitting the market, then the overall consumer price inflation will be under the Federal Reserve's desired inflation rate of 2%. At that point, there is no excuse not to cut interest rates."
The shelter index increased 6.5% over the last year, accounting for nearly 70% of the total increase in the all items less food and energy.
Potapov agreed, saying that no further tightening is necessary to bring down inflation. "All that is required is patience," she added.
"Knowing these trends, the bond and the mortgage market have already pivoted ahead of the Fed," Yun said. "Mortgage rates have come down for the fifth straight week. Even further declines are possible once the Fed actually does cut its short-term fed funds rates. Mortgage rates will slide under 7% next year and may reach 6% in a year."
The Fed has held its key benchmark interest rate in a target range between 5.25%-5.5% since July, following 11 consecutive rate hikes.
Fed Chairman Jerome Powell is expected to present the latest rate announcement and economic projections during a news conference Wednesday at 2 p.m.
The scheduled release of December 2023 CPI data is on January 11, 2024, at 8:30 a.m. Eastern Time.
