Inflation Hits Nearly One-Year Low—But These Prices Are Still Rising The Most

Topline

Inflation grew at the slowest pace since December last month in a promising sign for consumers, but economists warn it still may be too early for investors to get overly eager about stubbornly large price spikes finally abating—particularly as the rent, car insurance and education continue to drive outsize increases.

Key Facts

Consumer prices rose 7.1% on an annual basis—lower than the 7.3% spike economists were expecting and hitting the lowest level since December 2021 after a reading of 7.7% in October.

Prices also fared better than expected on a month-to-month basis, climbing 0.1% from October versus economist projections of 0.3%, according to data released by the Labor Department on Tuesday.

Though Tuesday’s report showed a deceleration in inflation, ongoing price increases are still “very elevated” and over three times greater than the Federal Reserve’s 2% target, Nancy Davis, founder of Quadratic Capital Management, wrote in a Tuesday email, adding: “This isn’t time for the Fed to take a victory lap.”

The Labor Department noted rent prices were “by far” the largest contributor to overall inflation last month—rising 0.6% since October and offsetting the impact of falling energy prices.

Despite meat prices falling 0.6% month to month, overall food prices still rose a greater-than-average 0.2% from October, as cereal, dairy and fruits continued to drive outsized gains.

Other areas still fueling inflation included recreation (as pet services and cable television prices jumped about 1% apiece), automobile insurance (up 1.1%) and education (up 0.3%).

Tangent

Falling gas prices (down 2%) and used vehicle prices (down 2.9% thanks to improving supply chains) helped the overall inflation figure cool more than economists expected, notes Pantheon Macro chief economist Ian Shepherdson, who also notes airline fares (down 3%) should “fall much further” over the next few months in the wake of falling jet fuel prices. However, Shepherdson notes overall wages remain too strong for inflation to hit the Fed’s 2% target without a “modest increase” in the unemployment rate.

Key Background

Some economists have argued the Fed could be risking an unnecessary recession by raising rates aggressively to help curb rising prices, but many also aren’t so sure inflation has slowed enough. Bank of America’s Michael Gapen says any delayed supply chain improvements could make inflation linger longer than the Fed expects and that current policy would likely only spur a “mild” recession. Further, Goldman economists in a recent note said they believe the Fed will likely act more aggressively than expected as inflation pressures persist, but that the economy is more likely than not to avoid a recession, thanks to consumer spending that should remain strong.

What To Watch For

The Fed’s next interest rate announcement is slated for Wednesday. Goldman economists forecast the central bank will authorize a half-point hike, followed by three quarter-point hikes next year. That would push the top borrowing rate to 5.25%—the highest level since 2007.

Further Reading

Americans Have Lost $6.8 Trillion This Year As Stocks Crashed, Housing Market Collapsed And Savings Dwindled (Forbes)

Market Awaits 2022’s Last Key Inflation Reading And Fed Meeting—Here’s What To Watch For (Forbes)