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Inflation remained stuck for the second month, ticking up to 2.7% in November and remaining at 3.3% for the third month in a row, when excluding food and energy. Used-car prices are no longer declining, but rising, so a major factor that had been driving down overall inflation at a faster rate has disappeared. New-vehicle prices rose 0.6%, their largest increase in over two years. The price of groceries rose 0.5%, their largest rise in two years, as well.
On the plus side, shelter costs excluding hotels rose a smallish 0.2%. This component accounts for a third of the total price index, and the modest rise in November is likely reflecting the easing of increases in rent and home prices. Going forward, shelter costs should contribute less to inflation than they have in the previous four years. Also in November, price increases were lower for car insurance, car repair, health insurance and hospital costs, which had previously seen strong uptrends. However, cost increases for other services remain stubbornly high, including haircuts and other personal services, recreation services, and veterinary and other pet services.
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This inflation report doesn’t help the Federal Reserve much, but it shouldn’t throw a monkey wrench into the central bank’s plans to make an interest rate cut on December 18, and likely another cut next spring. The Fed worries about any strength in services inflation because those tend to be persistent. Inflation rates should ease in the first half of next year. But the drop in the published inflation reports will be a head fake, as inflation will creep back up in the second half of the year, even without any new tariffs on imports. That could curtail the Fed’s plans for a longer series of interest rate cuts.
While news headlines focus on the Consumer Price Index, note that the Fed’s goal of 2% inflation is based on a measure called the personal consumption expenditures deflator, not the CPI. The PCE deflator tends to run about a half-percentage point below the CPI these days. The PCE deflator, excluding food and energy, rose at a 2.8% rate for the 12 months ending in October, compared with the core CPI’s 3.3%. Which is a long way of saying that even the Fed’s preferred measure is showing that inflation is still too high.
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