The blistering rise in inflation in 2022 appears to have peaked, with the latest data showing a more significant slowdown than economists expected. The welcome inflation news will likely set up the Federal Reserve to slow its most aggressive cycle of raising interest rates in decades.
The consumer price index, the market's preferred inflation metric, increased 7.1% from November 2021 to November 2022, the Bureau of Labor Statistics reported Dec. 13. Economists expected an increase of 7.3%, according to Econoday. Annual consumer price index growth has now dropped or remained flat since June, when it reached 9%, the largest increase since 1981.
"It's clear inflation is slowing down dramatically, which shows the Fed's medicine is working and the world is getting back to normal," said Callie Cox, a U.S. investment analyst at eToro.
Core consumer price index, which excludes food and energy from the broader government measure of price changes, increased 6% from November 2021, below expectations of 6.1%.
Energy prices, while still rising, increased less than in previous months. Gasoline, for example, increased by 10.1% year over year in November, compared with an annual increase of 17.5% in October.
"A slide in energy prices for consumers was a major source of deflationary pressure," Sarah House and Michael Pugliese, economists with Wells Fargo, wrote in a Dec. 12 note. "Gasoline prices have continued to unwind the surge seen earlier this year, and the initial data for December suggests further declines are likely in the near term. With food inflation also showing signs of rolling over, households are finally seeing relief from two of the biggest sources of purchasing power pain."
Average hourly earnings, meanwhile, grew by 5.1% from November 2021 to November 2022, up from 4.9% in October.
Inflation continues to impact regions differently. Year over year, inflation grew 6.4% in the Northeast and 7.7% in the South.
The lower-than-expected consumer price index report will likely do little to alter the Fed's plan to hike rates by 50 basis points following its meeting this week.
If the rate-setting Federal Open Market Committee does approve a 50-bps raise on Dec. 14, as anticipated, the central bank will have boosted rates by 425 basis points since March as part of its push to bring inflation closer to its target of 2% growth. While inflation is trending lower, the Fed is still expected to continue to push rates higher into 2023.
"It's good news all around and indicates that inflation has peaked, but I wouldn't expect the Fed to change its hawkish rhetoric or rate hike plans over the near term," said Kathy Jones, managing director and chief fixed-income strategist with the Schwab Center for Financial Research. "It's still a long way to 2%, and the Fed wants to be sure it doesn't ease up on the brakes too soon and allow inflation to rebound."
With inflation now appearing to be past its peak and the domestic jobs market remaining strong, the Fed may successfully tighten monetary policy without pushing the U.S. economy into recession, Cox with eToro said.
"What we're in now is the definition of a soft landing," Cox said. "Slowing price growth could show the Fed that it may be time to take the foot off the brake."