November Shows Decline in Key Inflation Measure as Federal Reserve’s Preferred Index Dips

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In a significant development, the principal inflation indicator favored by the Federal Reserve demonstrated a decline in November, signaling a potential easing of inflation. This trend is likely to be advantageous for Americans, potentially leading to lower interest rates and a respite from the recent surge in prices by 2024.

The latest data from the Commerce Department revealed a 0.1% decrease in U.S. consumer prices in November compared to October, and a 2.6% increase from the same month in 2022. This decline represents the most substantial monthly decrease since April 2020, amid the economic turmoil caused by the COVID-19 pandemic.

When excluding the often unpredictable food and energy sectors, the core inflation rate in November exhibited a modest 0.1% increase from October and a 3.2% rise from the previous year.

These figures indicate greater progress in combating inflation than many economists had anticipated. Inflation is gradually aligning with the Federal Reserve’s annual target of 2%, potentially paving the way for rate reductions by the Fed in 2024. Such cuts could lead to lower interest rates on a variety of loans, including mortgages and credit cards.

Loan rates, including those for significant purchases like cars and homes, usually follow the trend of Federal Reserve monetary policy. Consequently, when the Fed lowers its benchmark interest rates, consumer costs typically decrease, thereby freeing up additional financial resources for households.

Currently, there’s a downward trend in loan rates. The rate for the benchmark 30-year fixed-rate mortgage, for instance, has fallen to a six-month low of 6.67%, a significant drop from 7.79% in October.

American consumers are already witnessing some relief from high prices. For example, the cost of several components of a BLT sandwich has decreased over the past year, with bacon prices down by almost 1%, lettuce by more than 10%, and tomatoes by 4%. Additionally, prices for car rentals, airfares, and furniture have seen significant declines.

Following a series of rate hikes by the Fed — 11 since March 2022 — inflation has decreased from the high levels experienced last year, which were the highest in four decades. The Labor Department’s Consumer Price Index (CPI) reported a 3.1% increase in November from the same month in 2022, a decrease from a 9.1% year-over-year increase in June 2022.

Encouraged by this downward trend, the Fed has refrained from raising rates in its last three meetings and is contemplating three rate cuts next year. Rubeela Farooqi, chief U.S. economist at High Frequency Economics, suggests that the Fed’s policy stance is likely to shift from maintaining steady rates to reducing them gradually, depending on factors like labor market conditions, inflation, and economic growth. The expectation is that rate cuts could begin by mid-next year.

Despite concerns that higher interest rates might trigger a recession, the U.S. economy and job market have remained robust, fueling optimism for a “soft landing” — achieving the Fed’s 2% inflation target without plunging the economy into recession.

The inflation metric released on Friday by the Commerce Department, known as the personal consumption expenditures (PCE) price index, showed a peak year-over-year inflation of 7.1% in June 2022. The Fed prefers the PCE index over the Labor Department’s CPI because it reflects adjustments in consumer behavior in response to inflation spikes, such as opting for less expensive brands.

The report also highlighted that consumer spending increased by 0.2% last month, following a 0.1% rise in October. Personal income saw a 0.4% increase in November, slightly higher than the 0.3% increase in October.

Frequently Asked Questions (FAQs) about Federal Reserve Inflation Measure

More about Federal Reserve Inflation Measure

• Understanding Inflation Measures: PCE vs. CPI
• Federal Reserve’s Interest Rate Policy and Its Effects
• Analysis of November’s Decline in Inflation
• Impact of Fed Rate Cuts on Consumer Loans
• U.S. Economy’s Response to Fed Rate Hikes
• Exploring the Federal Reserve’s Preferred Inflation Gauge