U.S. Inflation Eased More Than Expected in November as Fed Eyes Pause in Rate‑Hike Cycle Next Year

Aslowdown in the pace of U.S. inflation in November reaffirms our view that the Federal Reserve will pause its rate-hike cycle in early 2023.

The Labor Department said CPI (the U.S. Consumer Price Index) rose 7.1% in November year-over-year (y/y), better than the consensus estimates of 7.3%, and down from 7.7% in October. The long-awaited moderation in inflationary pressures across consumer goods categories should be relief for Fed officials, since it helps alleviate the risk of rising inflation expectations. Nevertheless, the underlying pace of inflation still looks inconsistent with the Fed’s target – the stickier categories remained sticky – and will likely prompt the Fed to continue with additional rate hikes for now.

We expect the central bank will raise its target for the federal funds rate by a half-point at the December meeting to 4.25%–4.5%, with another increase early next year that will take the rate to just below 5%. From there, the Fed will likley pause and assess the economic effects of its tightening to date. If the economy weakens and inflation moderates, its next move will likely be down.

Lower prices for core goods, healthcare, and travel

In November, core goods prices declined 0.5% month-over-month (m/m) on a large drop in used car prices, which also began to pressure new car prices. Higher inventories, improved production of new cars, and a dearth of fleet purchases by rental car companies contributed to declines. Overall, retail used car prices in the CPI appear to be slowly catching down to price declines in the wholesale market, while vehicle replacement demand was smaller than many expected in the aftermath of Hurricane Ian.

Prices for retail goods weakened after holiday discounting from Amazon and other retailers, although November’s Black Friday reductions were in line with seasonal averages. Electronics and recreational goods fell 0.4% m/m, consistent with larger-than-usual seasonal discounting.

Healthcare insurance prices dropped once again, and this new pace should contribute to more moderate inflation in the broader healthcare category over the next year. The normalization in insurance company margins is now subtracting 3 basis points (bps) off headline m/m inflation, after adding a similar amount in 2022.