 | The Consumer Price Index (CPI) declined 0.3% in November |
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| Posted Under: CPI |
Implications: For now, Ben Bernanke is smiling because all is quiet on the inflation front. Consumer prices fell 0.3% in November, falling short of consensus expectations and are up only 1.8% from a year ago. "Core" prices, which exclude food and energy, were up only 0.1% in November, also coming in lower than consensus expectations, and are up 1.9% from a year ago. Neither figure sets off alarm bells. Instead, they suggest the Federal Reserve's preferred measure of inflation, the PCE deflator (which usually runs a ¼ point below the CPI) remains below the Fed's target of 2%. We don't expect this to last. With nominal GDP growth – real GDP growth plus inflation – running at 4%+, a federal funds rate at essentially zero will generate higher rates of inflation in the year ahead. Look for housing, which makes up about 30% of the CPI, to be a large contributor to higher inflation in the next few years. It's important to recognize that the Fed will not start raising rates just because inflation gets above its target of 2%. For the Fed, the key measure of inflation is its own forecast of future inflation. So even if inflation goes to roughly 3% next year, as long as the Fed projects the rise to be temporary it will not react by raising short-term interest rates. The Fed is more focused on the labor market and, we believe, is willing to let inflation exceed its long-term target of 2% for a prolonged period of time. The best news in today's report was that real average hourly earnings rose 0.5% in November, the largest rise since December 2008. This, as well as job growth and low financial obligations by households, will help support growth in consumer spending in the year ahead.
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