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The Line: Consumer Prices Rose Just 0.1% in November

Gregory Heym is Chief Economist at Brown Harris Stevens. His weekly series, The Line, covers new developments to the economy, including trends and forecasts. Read on for the latest report and subscribe here to receive The Line in your inbox.

It's been a busy week for economists, so let's get right to the highlights:

For those keeping score at home; that's one bit of good news, one bit of "meh" news, and one bit of bad news. Let's get into the details of each.

Consumer Prices Rose Just 0.1% in November

Economists were expecting a 0.3% increase in the consumer price index last month, so this is good news. A 1.6% decline in energy prices in November helped offset strong gains in the prices for shelter (+0.6%) and food (+0.5%).

Over the past year, CPI is up 7.1%—the lowest annual increase since December 2021.

Core CPI, which strips out food and energy prices, rose 0.2% last month and 6% over the past year. These increases were also less than expected, although core inflation remains well above the Fed’s target rate of 2%.

To sum up, take this as good news, as the headline inflation number is moving in the right direction. Just keep in mind that inflation is still way too high, and the Fed must continue hiking rates to bring it back down to Earth.

Speaking of Fed hikes…

Round Seven for the Federal Reserve

The Fed raised short term rates 0.50%, marking its seventh hike this year. This brings the federal funds rate to a target range of between 4.25% and 4.5%, its highest level in 15 years.

No surprise here, as Chairman Powell had telegraphed this move two weeks ago. There were some surprises in the Fed’s updated economic projections for 2023. Here’s a summary:

So, the Fed expects much lower economic growth than it did three months ago, but a higher rate of inflation and unemployment. Ouch.

Most importantly, Chairman Powell made it clear that while recent improvements in inflation data may warrant lower hikes, don’t expect the Fed to stop hiking for a while. In their economic projections, the Fed has the terminal federal funds rate—the level at which the Fed will end its rate hikes— at 5.1%. So, expect a few more hikes of 25 basis points, but don’t hold your breath waiting for the Fed to reverse course and cut rates anytime soon.

Retail Sales Fell 0.6% Last Month

Sales fell below the Dow Jones estimate of a 0.3% drop, which is bad news. Declines were seen in most categories, led by furniture and home furnishing stores (-2.6%), building materials and garden centers (-2.5%), and motor vehicle and parts dealers (-2.3%). Not surprisingly, the biggest increases in November were seen in restaurants and bars (+0.9%), and food and beverage stores (+0.8%). Over the past year, retail sales have risen 6.5%. That may sound good, but keep in mind that inflation is up 7.1% during that time. Since retail sales data is not adjusted for inflation, much of the increase in spending over the past year is due to the sharp rise in prices. Since consumer spending is roughly 70% of GDP, this report will only heighten concerns of a looming recession, which will be hard to argue with. The only saving grace is the continued strength of the labor market. That said, it’s looking more and more like the question is WHEN the recession will happen, not IF.

A Note of Thanks

This will be my last post for this year, so I’d like to take a moment and wish everyone a happy holiday season. I have many things to be grateful for, but will take this opportunity to thank you for reading The Line. I started writing this in July 2020, and never expected it to last this long, let alone to receive so much great feedback from our readers.

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