News & analysis

Disinflationary progress in the US effectively stalled in November, providing the Fed with further evidence that it can turn to tomorrow to relay a more cautious message on the path for rates than markets are currently factoring.

Having flatlined in October, headline inflation in November marginally beat expectations, printing up at 0.1% MoM. This slowed the decline in the annual rate, bringing it just 0.1pp lower to 3.1% YoY. Furthermore, core inflation, at 0.285% MoM, actually re-accelerated in seasonally adjusted terms, leaving the annual rate stable at 4% YoY. While most of the core inflation pressures emanated again from the housing market, with owner’s equivalent rent (OER) rising from 0.41% to 0.5% MoM and rent of primary residence holding firm at around 0.5% MoM, this shouldn’t mask from the fact that underlying inflation pressures also increased in November. This is best reflected in the Fed’s favoured “supercore” measure of inflation (core services ex OER and rent), which more than doubled in November from 0.217% to 0.44% MoM.

As a result, October’s soft inflation report now reads as one of those “head fake” data points that Chair Powell warned about last month.

In fact, smoothing out monthly distortions, the 3-month annualised rate of supercore inflation actually accelerated from 4.88% to 5.19% in November, its highest level since March. With today’s data piggybacking on Friday’s more inflationary jobs report, the latest hard evidence on the US economy all but confirms that the Fed will maintain its more cautious guidance on the path for policy, in line with intermeeting commentary from Chair Powell and New York Fed President Williams.

The Fed’s supercore measure of inflation ticks back up to levels last seen in March, suggesting disinflation in the annual core measure should continue to remain slow despite strong base effects in the coming months

Within the CPI basket, the main disinflationary drag came once again from energy, with the price of gasoline falling 6% on the month following a 5% decline in October, while fuel oil also fell 2.7%.

Outside of energy, the bulk of November’s disinflation occurred in core goods, which fell by 0.3% MoM. Most of this drag came from apparel, where prices decline by 1.3% in seasonally adjusted terms, likely due to greater Black Friday discounting. What was notable, however, was the 1.6% increase in used cars prices, which is at odds with the 2.1% drop in the Manheim index of used car auction prices. While the BLS has announced that it plans to update its methodology for measuring used car prices to account for vehicle depreciation over its lifetime, this isn’t set to take effect until January’s report. Nevertheless, with just a 2.5% weighting in overall CPI, this inconsistency does little to change the overarching readthrough of today’s inflation report.

With core goods continuing to drag on inflation, the bulk of core inflation stems from core services, which rose by 0.47% on the month.

As mentioned, a large proportion of services inflation came from shelter  components (+0.45%), with measures of rent proving sticky at around 0.5% MoM. However, stripping out the effects of housing, core services inflation momentum more than doubled. Within this sub-category, transportation services (1.1% MoM) and medical care services (0.6% MoM) provided the largest upside contributions. Within transportation services, inflation was almost exclusively driven by higher maintenance and repair prices (0.5%) and insurance costs (1%), with other major sub-components such as airline fares (-0.4%) falling on the month. While we have long argued that insurance and repair costs should begin to fall given declining new and used car prices in recent months, this is still yet to filter through. The story in medical care services is somewhat more interesting, and exemplifies the inflation concerns from the tighter labour market data on Friday as most of the job gains of late have been concentrated amongst healthcare professionals alongside government workers. Here, higher wage costs are becoming evident in consumer prices, with Physician services (0.6%) more than halving their price declines in October, while dental inflation persisted at a rate of 0.5% for a second consecutive month.

Whilst today’s data delivered a modest beat on expectations, the marginal overshoot did little to shift the narrative for markets heading into tomorrow’s Fed meeting, although it did lead FX markets to buy back into the dollar, as we warned in our morning note.

If anything, today’s data hit the perfect note for the Fed: hot enough to lend credibility to any hawkishness, but not so hot that they likely need to deliver on it. As such, policy easing bets saw only a modest pullback, with markets still fully pricing a rate cut by May and around 115bps overall in 2024. Similar to price action in short-term interest rate markets, price action was limited at best. Treasury yields added a handful of basis points to reverse earlier declines, which is nothing to write home about given the size of moves in recent months. Meanwhile, the dollar index initially saw some volatility on the announcement. But once the dust had settled, the DXY index was trading roughly flat on the day, reversing losses of around 0.5% prior. The full circle price action in markets today suggests that most traders are awaiting fresh guidance from the Fed tomorrow, both in the form of its updated dot plot projection and from Chair Powell in the press conference. Under our base case of a more conservative Fed relative to peer central banks such as the ECB on Thursday, we expect the dollar to continue posting marginal gains into year-end.



Simon Harvey, Head of FX Analysis


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