in November 2022

• Topline gauge of consumer prices saw inflation decelerate to 0.1% in November 2022 

• The pace of gains in the Core Consumer Price Index (CPI), less Food & Energy, declined to 0.2% in November 2022 

• Transportation costs reversed course, posting a decline of 1.1% in November 2022 

• Housing & Food price growth slowed in November 2022, up 0.4% and 0.5%, respectively

The Consumer Price Index (CPI) for November 2022 was up by 0.1% in seasonally-adjusted terms. This gain will be a welcome result for households that have not seen wage growth keep up with rampant inflation over the past two years. The November reading translates to a 7.1% year-over-year gain in topline prices. More importantly, when evaluating current conditions, the November monthly rise equals a 1.2% annualized pace, representing consumer price inflation conditions if November’s pace were to be maintained for a one-year period. Keep in mind that the Federal Reserve’s target for inflation – excluding volatile food and energy costs – is an average of 2.0% year-over-year growth. With so much damage in terms of price pressure having accumulated over the past year, however, annualized monthly growth provides a valuable perspective on where current inflationary conditions are with respect to that target. 

Core CPI – which excludes volatile Food and Energy prices – saw its monthly growth rate fall to 0.2% in November 2022. The Core CPI metric more closely aligns with the Federal Reserve’s inflation target (the Core Personal Consumption Expenditures (PCE) Deflator). At a 2.4% annualized growth pace in November, this month’s Core CPI growth release is a very positive sign for inflation trends. Core CPI inflation had been posting annualized monthly growth rates topping 7.0% throughout the middle months of 2022, but has now fallen sharply since September’s result. Monthly gains like November’s sub-2% annualized reading suggest that the Federal Reserve’s goal of extinguishing inflation are achievable in the near term. This is not to suggest that monetary policy will become less restrictive in the months to come. But at least the Fed will not likely see a need to become even more aggressive in their fight against inflation versus what has already been communicated. 

The Housing component of the CPI index gained 0.4% in November 2022. This component of the CPI measure is the largest influence on prices by weight, accounting for over 40% of the total index. And while growth is still at 5.1% at an annualized pace, Housing CPI gains have fallen for three (3) consecutive months. Existing home sales have seen an extraordinary collapse throughout this year, falling to a sales pace not seen since 2011. And home prices have declined nationally over the past several months as well. And while home values do not directly correspond to the Housing CPI data, they are certainly an indication of demand. So long as new housing demand continues to weaken, Housing CPI should continue to ease. Stability in energy prices would also go a long way to taming the Housing component of CPI inflation, which is notoriously sticky in its price growth trends over time. 

Energy prices fell back into declines in November 2022 after a bounce in October. Gasoline prices were down 2.0% for the month, and are now up only 10.1% year over year. This compares with a 17.1% year-over-year result in October. Prices remain high in absolute terms, but stability and a lack of renewed increases in energy prices is a critical step toward consumers’ ability to budget for such necessities. Talk of China’s economy transitioning from its “Zero COVID” strategy could disrupt the current calm by increasing demand from the world’s largest oil-consuming nation. And shocks such as supply disruptions to oil markets – natural or strategic by producers – can never be completely written off. But for now, there appears to be no new next wave of oil price pressures to flow through to U.S. consumers in the coming months. 

Despite the encouraging November 2022 CPI result, the Federal Reserve’s monetary policy tightening plans will remain intact. Their data dependency message will require acknowledgement of movement in the right direction on consumer price growth, but with labor markets remaining tight and consumer spending not slowing, the Fed will remain able to cite the risk of renewed inflationary pressure as cover for further interest rate hikes through the first quarter of 2023. There is significant risk that monetary policy will have become too restrictive given inflation’s momentum toward normality, hence PNC’s forecast of a three-quarter recession from 2023Q2 through 2023Q4. But it’s a risk that the Fed is clearly willing to take given that any inflationary embers not fully stamped out could cause much greater damage to the U.S. economy than the mild recession PNC views as likely in response to the Fed undercutting risk-taking and expansionary sentiment among both households and businesses.