When it comes to measuring inflation, or any economic data for that matter, the expectation tends to be more important than reality. If the data is in line with what analysts expect, the real number – no matter how good or bad – loses its impact. This was the initial reaction in the case of November's inflation reports. Both the consumer and wholesale price indices came close to expectations but were equal to or higher than prior measures. According to the financial markets and economists, the data was not bad, since the numbers were right on target. Forget that both reports clearly show the progress that has been made in inflation has stalled. Consumer price inflation is up 2.7% from a year ago and up 3.3% at the core level. Both rates are the highest since this summer. Producer price inflation year-over-year is up 3% and the core rate is up 3.4%, both rates at the highest since February 2023. Producer prices tend to foreshadow where prices are headed for the consumer, in this case suggesting a rising, rather than declining, direction.

Economists’ assessment of the inflation data tries to justify the numbers as “not as bad as it looks” by dismissing various one-off situations. Food was the main culprit for the rise in CPI and PPI in November. At the consumer level, grocery prices jumped the most in almost two years. On the producer side, the gains were more startling with food prices accounting for 80% of the rise in goods prices. Egg prices surged 55%, due to another widespread outbreak of the bird flu, fruit prices jumped 22% and fresh and dried vegetables rose 33%. These specific increases reveal how just a few items can cause the overall index to move out of sync, whether temporary or not. Many of the other index components suggested a muted increase.

More concerning is that goods prices, which had been a driver of disinflation over the past year, have been moving higher for the past few months. Even without the impact of food and energy prices, the cost of goods climbed the most since May 2023. Household furnishings and apparel added to the increase. On the other hand, services prices are beginning to show some slight improvement. Shelter costs, which have long been a thorn in CPI and account for 40% of the index, increased 4.7% over the last year, the smallest 12-month increase since February 2022. Owners’ equivalent rent, a subset of the shelter index, rose in November at the smallest pace in three years. In the end, it is difficult to know if inflation is stalling or moving higher, which is why many Fed officials are in favor of a slower, measured approach to cutting rates.

Fed Preview – The Federal Reserve Open Market committee begins its two-day meeting on December 17 with the formal press release the following day. Despite signs of inflation not receding as fast as hoped, the futures market still predicts a 95% chance for a 25 basis point cut. This will bring rate cuts to 100 basis points this year and close to where the Fed projected the fed funds rate would be at the end of 2024.