U.S. inflation falls by more than expected in November, bolsters case for lower interest rates from the Fed

The increase in inflation over the past year slowed again to 2.6% from 2.9% in the prior month, marking the lowest level since February 2021.

The more closely followed core PCE rate that excludes food and energy rose a scant 0.1% in November. Economists polled by The Wall Street Journal had forecast a 0.1% increase.

The increase in the core rate over the past 12 months decelerated to 3.2% from 3.4% in the prior month. That’s also the smallest increase since early 2021.

The gradual tapering of inflation persuaded the Fed last week to leave its key short-term interest rate unchanged at a range of 5.25% to 5.5%.

Many investors and Wall Street economists think the next move will be a reduction in interest rates, but Fed officials stressed this week that they are likely to keep rates high for awhile.

Just how long the Fed sticks to its guns will depend on how fast inflation wanes. The central bank predicts the core rate of PCE inflation will slow to 2.4% by the end of next year, within sight of its 2% target.

Yet some analysts predict inflation will slow even faster if high interest rates dampen the economy. Businesses would likely cut prices to drum up demand if sales slow enough.

The Fed is aiming to slow inflation to 2% or even less – and the central bank has succeeded if investors go by the last six months.

The increase in so-called core inflation in the past six months, if expressed at an annualized rate, has slowed to 1.9% in November from 2.3% in the prior month. The core rate excludes volatile food and energy costs.

Put another way, if inflation rose at the same rate over the next six months as it did in the past six months, the Fed would have achieved its goal.

The 12-month rate of core inflation, by contrast, registered 3.2% in November.

Whatever the case, six months is a long way off and a lot can happen. Gasoline prices, for example, are unlikely to keep falling. Lower energy prices have helped to reduce inflation.

The cost of services, meanwhile, remain stickier. High housing costs and rising wages could also help to keep inflation elevated .

Still, some economists think the Fed is on the verge of victory in its battle against inflation.

“Post-pandemic inflation is over,” said Andrew Hunter, deputy chief U.S. economist for Capital Economics, after November’s PCE figures came in.

After factoring in a further sharp slowdown in rent inflation that’s still in the pipeline, “it’s hard to see any credible reason” why the annual inflation rate won’t return to the 2% target over the coming months, Hunter wrote in a note.

Others were more cautious. “Core inflation is weaker because of a major disinflation in goods. That may keep core readings softer in coming months but is not sustainable way to return inflation to target. Declining prices are associated with a normalization in supply chains that has fully played out. Disruptions to Red Sea trade are just one example of the increased upside risk to goods inflation post pandemic,” Andrew Hollenhorst, Citi’s economist said.

“December core PCE is likely to be much stronger, but Fed officials will likely continue to encourage markets to look through evidence of sticky inflation.”

The Federal Reserve is poised to take “undeserved credit” for the drop in inflation, argued Bryce Doty, senior portfolio manager at Sit Investment Associates, following Friday’s November PCE report, which saw the six-month annualized core rate fall below 2%.

“The Fed will likely take undeserved credit for this achievement. A surge in the labor force above long term trend lines has cleared up a myriad of supply chain induced shortages that has helped reduce the pace of inflation as much as the country experienced post World War II when soldiers re-entered the work force,” Doty wrote.

That’s in contrast to the Fed’s goal, which was to eliminate jobs to increase unemployment believing that would reduce wage pressures, Doty said.

“History will show it was the sharp increase in the supply of labor, goods, and services that brought down costs. Increasing rates as high as the Fed has does hurt economic growth though and we expect growth to evaporate over the next two quarters,” he said.

Biden celebrates

President Joe Biden and his team are celebrating the latest reading for the Federal Reserve’s preferred inflation gauge, as elevated prices remain a top issue in the 2024 White House race.

“Today marks a significant milestone with inflation over the last six months at the pre-pandemic level of 2 percent,” Biden said in a statement Friday.

That’s a reference to a metric focused on the past six months that MarketWatch’s Jeffry Bartash highlighted earlier.

“But make no mistake: while my economic plan is getting us back on track, our work is far from finished,” Biden also said in his statement.

“Prices are still too high for too many Americans, and I know the strain that can put on hardworking families. That’s why I’m laser focused on lowering costs — from bringing down the price of insulin, prescription drugs, and energy, to addressing hidden junk fees companies use to rip you off, to calling on large corporations to pass savings on to consumers as their costs moderate.”

In a similar vein, a top Biden economic adviser, Lael Brainard, also talked up the latest data for the price index for personal consumption expenditures, or PCE.

Americans “really are seeing prices coming down, whether it’s gas — a gallon of gas is now close to $3, a big reduction over the course of the year. A gallon of milk, chicken at the grocery stores, eggs, toys. I mean, you look across the board, and you’re actually seeing prices coming down over the year,” said Brainard, director of Biden’s National Economic Council, in a CNBC interview on Friday.

Consumer spending holds up in November

In other data published Friday, consumer spending rose a modest 0.2% in November, pointing to somewhat slower growth in the U.S. economy.

Analysts polled by the Wall Street Journal had forecast a 0.3% increase.

Consumer spending is the main engine of the U.S. economy. Spending was also soft in October.

Incomes rose 0.4% last month. Incomes are finally rising faster than inflation and giving Americans more room to spend.

Americans spent more last month on housing, utilities, dining out and hotel stays.

They spent less on gasoline because of cheaper oil prices.

The economy has slowed after a surprising strong 4.9% surge in gross domestic product in the third quarter. But growth is still strong enough to deter businesses from laying off workers or to put the U.S. on a path to recession.

Meanwhile, consumer sentiment finished 2023 at a five-month high, perhaps a good sign for the economy as a new year gets under way.

The final reading of the sentiment survey inched up to 69.7 from 69.4 earlier in the month, the University of Michigan said Thursday.

The consumer-sentiment survey reveals how Americans feel about their own finances as well as the broader economy. The index had fallen four months in a row before rebounding in the final month of the year.

Cheaper gas prices, slowing inflation, a stock-market rally and a strong labor market have given consumers more confidence in the economy.

Key details: A gauge that measures what consumers think about the current state of the economy dipped to 73.3 from a preliminary 74.0.

Jeffrey Bartash and Isabel Wang contributed to this story