US CPI inflation lower than expected

US CPI inflation in November was lower than expected. Headline inflation over twelve months fell to 7.1%, below market expectations of 7.3% and much below the 7.7% recorded in October. Month-on-month, headline inflation was 0.1%, against market expectations of 0.3% and 0.4% observed in October.

Similarly, core inflation, at 6.0%, was also lower than market expectations of 6.1%, and below the 6.3% recorded in October. Month-on-month, core inflation rose by 0.2%, against market expectations of 0.3% and 0.3% observed in October.

Source: BLS, data as of 13 December 2022.

As in the recent past, the index for shelter was much the most important component of inflation, contributing about one third of headline inflation and half of core inflation. Since rental contracts change only rarely, the shelter component is not reflective of current conditions in the rental market but changes only slowly over time. This fact, together with its large weight, 33% of headline inflation and 42% of core inflation, will delay the decline of inflation to pre-Covid levels.

This is the fifth month in a row that headline inflation has fallen, and the second month in a row that core CPI inflation declined. As the figure below shows, the behaviour of monthly inflation appears to have changed from July 2022 onward.

Source: FRED, data as 13 December 2022.

While monthly headline inflation averaged 0.84% between December 2021 and June 2022, it averaged 0.20% between June and November 2022. The decline in monthly core inflation was less marked, from 0.55% to 0.39%, but still notable.

While this decline in inflation will give Federal Open Market Committee (FOMC) members some comfort that inflation is responding to the tightening of monetary policy, they are unlikely to view this as proof that inflation will definitely decline to target. Thus, it will have little impact on the FOMC decision on 14 December. However, if December inflation also shows that core inflation is falling, views may change.

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