The CPI inflation report could signal an earlier Fed pause if it is positive.

David Smith
Read Time3 Minute, 19 Second

The Consumer Price Index (CPI) Report for the month of November indicated that inflation in the United States may be decreasing. Prices grew 0.4% month-over-month, while prices excluding food and energy increased 0.3%. These were low enough to reduce the inflation rate year-over-year to 7.7%.

This is only one month of pricing data, but there are several indications that U.S. inflation may be receding, since more prices are falling in absolute terms on a monthly basis. We still have a ways to go before inflation reaches the Fed’s 2% target.


Some Costs Are Declining.

Now, prices are falling across a larger range, including used automobiles, apparel, and medical services. In addition, certain energy-related expenses decreased, but these series are more volatile. On a more granular level, the prices of some household furnishings and equipment as well as a number of food items decreased (discussed below). These lowering costs can help offset those that are still growing and contribute to a decline in inflation. Previously, most prices rose in tandem.

The Housing And Food Costs


In the CPI index, housing and food carry a disproportionate amount of weight. The expense of housing continues to grow. In fact, the rate of growth rose in November’s report, which was the highest monthly gain since November 1990.

This contradicts the softening home market in the United States. This is due to the statistical specifics of how the CPI series is constructed, which makes it a more trailing indicator of recent house price changes.

As a result, the Fed may be less concerned about the rise in house prices in the coming months, given that the trend is projected to reverse. If and when this occurs, it may assist reduce inflation.


Food costs may be beginning to decline. This is great news, as rising food prices disproportionately affect individuals with lower incomes. Food expenses also make up a significant portion of the CPI calculation. In the past year, food costs have increased by over 11 percent annually. In the November report, however, the increase was 0.6% month-over-month, indicating an annualized increase of 7.4%.

In aggregate, food costs continue to rise substantially, although these increases may be moderating. The prices of animal proteins, eggs, grains, and beverages continue to rise. However, in a pleasant development, the prices of fresh fruits and vegetables as well as milk are now declining.

Consequently, inflation remains extremely high and substantially beyond the Fed’s target. However, if the patterns in today’s report continue, we will begin to see an increase in absolute price declines, offsetting those that are still increasing.

Auch in Zeiten von Inflation sind Immobilien eine vergleichsweise gute und sichere Kapitalanlage. (Foto: von Poll Immobilien)

In addition, a substantial amount of growing prices can be attributed to housing costs, given their high weight in the CPI. Here, we can be rather optimistic that the current downturn in housing will eventually convert to the CPI series within the next few months.

Fed’s Response

Even if we are not out of the woods yet, this was the type of data the Fed had hoped for, especially given that recent estimates indicated inflation could reach a higher level.

Obviously, a single month of data does not constitute a pattern, and we have previously observed low monthly values that did not persist, such as April of this year. However, there are indications that inflation is declining. Now the difficulty is determining where inflation will go from here. Even the November report suggests an annualized inflation rate of 5%, which is much beyond the Fed’s target.

The Fed had previously signaled its intention to suspend rate hikes at some point in the first half of 2023; however, the November CPI report suggests that this pause could be brought sooner. This may also pave the way for a lesser rate hike at the Federal Reserve’s December meeting if future economic data is encouraging.

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