Fed's favored inflation gauge tumbles in November as price pressures continue to ease
WASHINGTON — The Federal Reserve's preferred price gauge fell last month, another sign that inflation is easing and that Americans should benefit from lower interest rates and get relief from painful price shocks in 2024.
Friday's report from the Commerce Department showed that U.S. consumer prices fell 0.1% last month from October and rose 2.6% from November 2022. The monthly decline was the largest since April 2020, when the economy was reeling from the COVID-19 pandemic. .
Excluding volatile food and energy prices, so-called core inflation rose 0.1% last month from October and 3.2% from a year earlier.
The figures show slightly more progress in the fight against inflation than economists expected. Inflation is steadily falling toward the Fed's annual target of 2% and appears to be paving the way for Fed rate cuts in 2024. That in turn could translate into lower interest rates on everything from mortgages to credit cards.
Interest rates on loans for cars, homes, and other larger purchases generally follow the direction of the Fed's monetary policy, so cutting interest rates in the U.S. typically lowers consumer costs and frees up more money for households to spend elsewhere to give.
The interest rate on the benchmark 30-year fixed-rate mortgage is already falling, falling to a six-month low of 6.67% this week, down from 7.79% in October.
Americans have already seen some relief from high prices. Consider the ingredients of a BLT sandwich: Prices have fallen nearly 1% for bacon, more than 10% for lettuce and 4% for tomatoes in the past year. Car rental prices have fallen by 11%, airline tickets by 12% and furniture prices by 3%.
After nearly two years of Fed rate hikes — 11 since March 2022 — inflation has fallen from last year's four-decade high. The Department of Labor's closely watched Consumer Price Index was up 3.1% last month from November 2022, compared with a 9.1% year-over-year increase in June 2022.
Encouraged by the progress, the Fed has decided not to raise rates at each of its last three meetings and has indicated that it expects to cut rates three times next year.
“A continued easing of price pressures will support a shift in the Fed's policy stance next year from keeping rates steady to lowering them over time,” said Rubeela Farooqi, chief US economist at High Frequency Economics. “That will depend on how the labor market, inflation and growth will evolve next year. Based on our forecasts, we expect the Fed to start cutting rates by the middle of next year.”
Despite widespread predictions that higher interest rates would trigger a recession, the U.S. economy and labor market have remained strong. That has raised hopes that the Fed can achieve a “soft landing,” bringing inflation to its 2% annual target without plunging the economy into recession.
The U.S. inflation gauge released by the Commerce Department on Friday is called the personal consumption expenditures (PCE) price index. It showed that annual inflation peaked at 7.1% in June 2022.
The Fed prefers the PCE index to the Department of Labor's CPI, in part because it takes into account changes in the way people shop when inflation rises — for example, when consumers shift away from expensive national brands in favor of cheaper store brands .
Friday's report also showed that consumer spending rose 0.2% last month, after rising 0.1% in October. Personal income rose 0.4% last month, up from 0.3% in October.