With the FOMC meeting just 2 days away, the Bureau of Labour Statistics released its much-awaited, final CPI print of the year.
Overall inflation had eased to 7.1% YoY, from 7.7% in the previous month, coming in below economists’ polls of 7.3%.
This was the lowest annualized reading this year, having peaked at 9.1% in June 2022. Interested readers can view commentary on the June print here.
Core (non-food, non-energy) inflation also eased to 6%, falling from a peak of 6.7% earlier in the year, and coming in lower than the October reading of 6.3%.
Source: BLS
This decline is likely a combination of multiple factors, including an improvement in the Ukraine-Russia situation, restoration of some supply chains, declining shelter costs and the Fed’s aggressive tightening measures.
Regarding the health of supply chains, the Institute of Supply Management found that factory prices for goods recently fell to a two and a half year low.
The shelter index rose 7.1% during the year, and 0.6% on the month.
The energy index increased 13.1% YoY, while the gasoline index, fuel oil index and the electricity line item rose 10.1%, 65.7%, and 13.7%, respectively.
On a monthly basis, the gasoline index, natural gas index and electricity declined 2%, 3.5% and 0.2%, respectively.
At the time of writing, given the better-than-anticipated reading, the DJIA, S&P 500 and Nasdaq were up 1.6%, 1.4% and 1.3%, respectively.
Optimism was driven by expectations that the Fed may ease its interest rates pathway into 2023 and beyond.
For the month, headline CPI was up 0.1%, while core CPI was relatively muted, rising only 0.2%.
Source: BLS
Justin Wolfers, Professor of Public Policy and Economics at the University of Michigan, tweeted,
Remarkably good news, for the 2nd month in a row. Inflation has clearly peaked.
Market outlook
The FOMC is almost certain to raise rates by 50 bps later this week with CME reporting an 80% chance of reaching 4.25 – 4.5% levels.
Source: CME FedWatch Tool
Moreover, inflation expectations also seem to be on the way down.
Source: NY Fed
Wolfers believes that,
There’s no broader inflationary psychology.
It is true that we can expect the stubborn shelter index to ease in coming months, in line with the declines in the Case-Shiller housing indicators (which I covered in a story here.)
However, with winter approaching, oil prices could still pose a threat, particularly if geopolitical uncertainties happen to re-emerge, leading to a potential spike in the CPI.
In addition, former Fed insider and Founder of Quill Intelligence, Daniella DiMartino Booth, believes that main street is particularly concerned about the prospect of rising food inflation.
This week, all eyes will be on the Fed’s Summary of Economic Projections and the dot plot, to gauge the institution’s pathway ahead in the coming 12-18 months.
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