Core Inflation Measures Remain Above the Fed’s Target Despite Cooling in Shelter Prices

Key Takeaways:

• The Consumer Price Index (CPI) increased 0.3 percent over the month in November, the largest increase since April, according to the Bureau of Labor Statistics (BLS). Compared to a year ago, prices rose 2.7 percent, an increase of one-tenth compared to October. Food prices rose 0.4 percent, while energy prices were up 0.2 percent. Excluding food and energy, core CPI increased 0.3 percent over the month for the fourth consecutive month. Compared to a year earlier, core inflation rose 3.3 percent, the same reading as the prior two months. Both owners’ equivalent rent (OER) and rent of primary residences increased just 0.2 percent over the month, the smallest increase since mid-2021 for both categories. However, other core prices rose at a stronger pace, with used car prices (+2.0 percent), new vehicle prices (+0.6 percent), and medical care services (+0.4 percent) all contributing to above-target inflation.
• The Producer Price Index (PPI) increased 0.4 percent over the month and 3.0 percent compared to a year prior in November, according to the BLS. Core PPI (excluding food, energy, and trade services) increased a more muted 0.1 percent over the month, though the year-over-year comparison remained elevated at 3.5 percent.
• The National Federation of Independent Business (NFIB) Small Business Optimism Index jumped 8.6 points to 111.3 in November, the highest level since June 2021. The increase in the headline index was driven in large part by a 41-point surge in the net percentage of respondents who expect the economy to improve; the measure now sits at 36 percent. Additionally, 14 percent of respondents expect real sales to be higher in the next six months, an improvement of 18 percentage points. Despite the improvement in optimism, businesses reported only muted improvements in plans to expand, with 18 percent of firms planning to increase employment on net (+ 3 percentage points) and 28 percent planning capital expenditures in the next three to six months (+6 percentage points).

Forecast Impact:

The November CPI report is another data point suggesting that core inflation measures have remained sticky in recent months. Still, the slowdown in OER and rent prices is an encouraging sign that measures of shelter inflation may finally be slowing in line with more timely market data on newly signed leases. Additionally, the modest monthly increase in core PPI, particularly in the categories that feed directly into the Fed’s preferred PCE measure of inflation, suggests core inflation may cool in coming months. Our forecast continues to call for gradual deceleration in core inflation measures toward the Fed’s target.

While the sharp jump in small business optimism would be encouraging for our outlook on its face, we note that actual plans to expand employment or investment were far more muted. As such, the increase in headline small business optimism will have no meaningful impact to our forecast.

Nathaniel Drake
Economic and Strategic Research Group
December 13, 2024

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