A November slowdown in inflation could give consumers relief both from rising prices and rapidly rising interest rates.
Consumer price index (CPI) data released Tuesday by the Labor Department still showed inflation near 40-year highs. But a slower pace of price growth may help Americans catch a break from more than a year of rapid inflation, all while giving the Federal Reserve room to hike interest rates at a slower pace.
“Cooling inflation will boost the markets and take pressure off the Fed for raising rates, but most importantly this spells real relief starting for Americans whose finances have been punished by higher prices,” said Robert Frick, a corporate economist for Navy Federal Credit Union, in a Tuesday analysis.
“This is especially true for lower-income Americans who are disproportionately hurt by inflation,” Frick said.
The annual inflation rate fell to 7.1 percent in November, down from 7.7 percent in October and in line with economist estimates of a 7.3 percent annual inflation rate. Prices rose just 0.1 percent in November alone, down from a 0.4 percent monthly inflation rate in October.
The November dip in inflation is a promising, if early, sign that the worst of rapid price growth may be behind the U.S. After peaking at 9.1 percent in June, the annual inflation rate as measured by the CPI has fallen steadily over the fall and is expected to fall even further into winter.
While prices are still rising at a brisk pace, a steady decline in inflation is the first step toward prices staying flat and giving consumers a chance to catch up. The November inflation decline will also keep the Fed on track to raise interest rates at a slower pace, which could give Americans relief from quickly rising mortgage rates, car payments and other debts.
The Federal Open Market Committee, the panel of Fed officials responsible for setting interest rates, is set to begin a two-day meeting Tuesday and announce a likely 0.5 percentage point interest rate hike on Wednesday afternoon. The November inflation report gives the Fed room to raise rates by a smaller amount after four increases of 0.75 percentage points in consecutive meetings since June.
Fed Chairman Jerome Powell said in November that the central bank will continue to hike interest rates into 2023 and keep them at a level meant to slow the economy into lower inflation. The Fed has already raised its baseline interest rate to a range of 3.75-4 percent and is expected to raise it by at least another percentage point before stopping sometime next year.
That means consumers with adjustable rate mortgages, car loans, credit cards and other loan products will still see those interest rates increase, but at a slower pace than earlier in the year.
“Slowing price growth could show the Fed that it may be time to take the foot off the brake,” said Callie Cox, U.S. investment analyst at online investment platform eToro, in a Tuesday analysis.
Where prices rose and fell
Energy prices continue to drop rapidly from their peak over the summer, falling 1.6 percent last month alone. Gasoline prices fell 2 percent in November, and piped gas service got 3.5 percent cheaper last month.
Prices for non-food or energy commodities — a broad category including household furnishings, appliances, decorations and housekeeping supplies — also fell 0.5 percent on the month. Used cars and truck prices, which exploded throughout most of the pandemic and early recovery, also fell 0.5 percent in November.
While consumers are sure to feel relief at the pump and in their energy bill, another steep increase in rents and the steady climb of food prices are still squeezing household budgets.
Prices for shelter rose 0.6 percent and were “by far the largest contributor” to the overall November increase in prices, the Bureau of Labor Statistics said. Food prices also rose 0.5 percent on the month and are up 10.6 percent on the year.
“The 0.6% increase in shelter prices was more than enough to offset deflation in core commodities. That said, real-time data on market rents from sources like Zillow and Apartment List shows a large decline in rent growth in recent months, which is likely to pass through into official data soon,” explained Sinem Buber, economist at ZipRecruiter, in a Tuesday analysis.
Updated at 9:35 a.m.