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US: Energy Mutes November CPI, but Core Inflation Firm

Consumer prices were flat in November as a drop in energy prices offset increases for food and core items. While headline inflation has eased, the core remains consistent with the Fed’s inflation goal.

Foot Off the Gas

Consumer prices were unchanged in November. The flat reading pushed the year-over-year change to 2.2%, which is down from 2.9% as recently as July. The more benign inflation picture for both November and the most recent 12 months has been due in large part to the pullback in energy costs. November’s plunge in oil prices led to a 4.2% drop in gasoline prices. Prices in this category are now up “only” 5% year over year, with further moderation to come as prices have continued to slide through the first half of December.

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The overall decline in energy prices was a more modest 2.2% due to a rise in energy services. A roughly 25% rise in natural gas prices sent the cost of utility gas services up, while electricity prices backed up the largest gain in four years with another rise in November.

Meanwhile, food prices rose at both the grocery store (+0.2%) and restaurants (+0.3%). That said, we still do not expect headline inflation to get much help from the food away from home component in the coming months given the recent pressure on agricultural and livestock commodities.

Core Inflation Edges Up

Core inflation rose 0.2% as the underlying trend in inflation remains firm. Core goods prices rose for a second consecutive month (+0.2%), again on the back of used car prices. The oddly large drop for this component in September (-3.0%) has now been fully unwound with another 2%+ gain, and puts the index more in line with the industry’s Manheim index. Core goods are now up 0.2% over the past year, the first 12-month gain since 2013.

Core services moved up 0.21%, which was a bit stronger than October but generally in line with the recent trend. A pickup in shelter and medical care costs more than offset softer readings for transportation services.

Consistent With, But Not Blowing Past, the Fed’s Target

At 2.2% year over year, the core remains consistent with the Fed’s target, as CPI tends to run a few tenths above the core PCE deflator. Recent developments, however, suggest that the overall inflation picture is at little risk of becoming unbridled from the Fed’s goal. The dollar’s continued strength should help to keep a lid on goods prices even as tariffs have pushed some input costs higher. The slowdown in housing also points to prices in the sizeable shelter component growing a bit more modestly in the coming year. At the same time, the decline in oil prices over the past six weeks has put the brakes on what was already a tenuous recovery in inflation expectations.

Nevertheless, capacity constraints—particularly for labor—and a greater willingness to raise prices mean a marked pullback is unlikely. We expect core CPI to run moderately above 2% in 2019, giving the Fed the green light for some additional tightening.

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