WASHINGTON – An inflation metric that the Federal Reserve closely monitors saw only a slight increase last month, suggesting that inflationary pressures have started to ease following two months of significant hikes.
According to a recent report from the Commerce Department, prices rose by a mere 0.1% from October to November. When volatile food and energy prices are excluded, prices still only increased by 0.1%, contrasting with larger increases of 0.3% that were observed in the preceding two months.
This subdued inflation data emerges just two days after Federal Reserve leaders, including Chair Jerome Powell, surprised financial markets by reducing their forecast for interest rate cuts in 2025. The new outlook indicates only two reductions, down from a previous estimate of four cuts. Powell indicated that more persistent inflation may be the primary reason for this revised outlook, suggesting that ongoing inflation could prevent the central bank from proceeding with further rate cuts. Higher rates from the Fed would likely keep borrowing costs for consumers, including mortgage rates, at elevated levels.
Despite the moderation in monthly inflation figures, there was a slight uptick in year-over-year inflation, which rose to 2.4% in November from 2.3% in October, remaining above the Fed’s target of 2%. On the other hand, the year-over-year “core” inflation, which excludes volatile food and energy prices, remained steady at 2.8%. The Federal Reserve focuses primarily on these core figures, as they are considered more indicative of future inflation trends.
The modest inflation rates likely contributed to the Fed’s decision to consider interest rate cuts, as their preferred inflation measure, the personal consumption expenditures (PCE) price index, is trending lower and appears closer to the desired target compared to the more widely noted consumer price index (CPI), which was reported at 3.3% in November.
The report also highlighted that consumer spending showed a healthy increase of 0.4% from October to November, signaling that households continue to drive economic growth. Additionally, a recent government report indicated that the U.S. economy expanded at a robust annual rate of 3.1% last quarter, largely fueled by consumer spending.
An economist at Nationwide Financial, Oren Klachkin, noted in a client communication that the outlook for the economy is positive as it approaches the holiday season. He acknowledged the Fed’s desire to lower interest rates further but expressed concern amidst the rising inflation and strong economic growth.
Incomes were also reported to have increased by 0.3% last month, surpassing the increase in prices. If this trend continues, it may help Americans cope with rising living costs over time.
Powell emphasized that the recent inflation report, even if it showed unexpectedly low figures, would not significantly alter the Fed’s perspective. He stated at a news conference, “Our position shouldn’t change based on two or three points of good or bad data… we still have some work to do.”
According to the PCE price index released recently, inflation has significantly decreased from a peak of 7.2% in June 2022 to 2.1% in September. The Federal Reserve typically combats inflation by incrementally raising borrowing costs to cool down spending and economic growth.
In a Wednesday meeting, Fed officials adjusted their inflation forecast for the end of 2025 to 2.5%, which is slightly above the current rate. They still anticipate a slight decline in core prices by the end of the following year, also expected to be around 2.5%.
Powell remarked, “It’s way below where it was but we really want to see (more) progress on inflation. As we think about further cuts, we’re going to be looking for progress.” The Fed decided to lower its benchmark rate by a quarter point to about 4.3% last Wednesday after previously implementing a larger half-point cut in September and a quarter-point cut in November.
The Federal Reserve generally favors the PCE index over the more recognized CPI. The PCE index attempts to adapt to changing consumer behaviors when inflation rises, such as when consumers switch to more affordable store brands from costlier national brands.
Typically, the PCE index displays a lower inflation rate compared to the CPI, partly because rents—which have surged—are weighted more heavily in the CPI.