If you follow the headline numbers (what’s known as All Urban Consumers) for the Consumer Price Index (CPI), you’d say, “See inflation continues to fall; the Federal Reserve will cut rates quickly in 2024.”
But you’d be following the wrong CPI number. The Fed doesn’t use this inflation measure, preferring the core Personal Consumption Expenditures index (PCE), but the version of the CPI that comes closest to the inflation measure that the Fed watches is the core CPI. That’s the inflation rate excluding changes in the price of food and energy, which tend to be the most volatile components of the headline CPI.
In today’s report the Bureau of Labor Statistics said that the headline, all-items CPI inflation rate (seasonally adjusted) was up just 0.1% in November from October. In October that rate was unchanged. The annual headline inflation rate in November was just 3.1%. Great news, right. Inflation continues to come down and is getting closer to the Fed’s 2% target. Interest rate cuts in 2024 aren’t far away.
Except that core CPI inflation continues to run hotter than the headline number. (Thank drops in energy costs for the decline in headline CPI and stubbornly high housing costs for the lag in the core rate.) The core rate, that’s the index for all items less food and energy, rose rose 0.3% in November. That’s a slightly bigger month-to-month increase that the 0.2% in October. The annual core CPI inflation rate was 4.0% in November. That’s the same 4.0% rate as in October. For the core CPI a rise in shelter prices offset the decline in gasoline prices.
Some economists believe that shelter prices will finally begin to fall in 2024 with a drop in prices and a downward movement in core CPI inflation in the spring.
Probably.
Which is a good argument, in my mind, for the Federal Reserve to wait on interest rate cuts in 2024.
Core inflation remains stubbornly high at a 4.0% annual rate and it would make sense for the Fed to wait to see if the core rate begins to fall in the spring along with a decline in shelter prices.
The last thing the Fed wants to do is to cut on the basis of projections about future inflation trends and to have to pause or raise rates when the projected decline in rates doesn’t materialize on schedule.
As of 11 a.m. New York time on Tuesday December 12, the yield on the 10-year Treasury was 4.22%, down 1 basis point for the session.
The Federal Reserve’s rate setting body, the Open Market Committee meets tomorrow, December 13 and is expected to keep the Fed’s benchmark interest rate at 5.25%-5.50%.
