The November Consumer Price Index (CPI) data delivered an unexpected Christmas gift of sorts with a particularly cool print on inflation, far cooler than anyone had expected. The news that CPI increased 0.2 percent from September’s readings is definitely a sign that the economic landscape has changed. Even with this welcome improvement, CPI is still very high, reflecting a structural stress test for America’s economic policy makers.
Last month’s CPI was up a whopping 2.7 percent from a year ago. This marked a decrease from the prior month’s rate, which was 3 percent. Core CPI, a measure that excludes the more volatile food and energy prices, increased by 0.2 percent since September. Core CPI has hit an unprecedented annualized rate of 2.6 percent. This change represents a big break from the past, when we still saw higher annualized core inflation prints.
Economic Implications of November’s CPI Data
The October CPI results surprised most economists who had been predicting a 3.1 percent rise. This gap brings into question how inflation will continue to evolve going forward and the ability of monetary policy to address it. The weaker-than-expected data points to an environment where inflationary pressures will begin to abate. Don’t forget that the CPI is still well above the Federal Reserve’s target goal of 2 percent.
A few economists warned against reading the November report as a clear, unambiguous indication that inflation is on a downward path. With no October comparison data included in the report, it is unclear how sustainable any of this downward movement is.
“Economists may be hesitant to read too much into this report as the start of a downward trend in inflation because of the lack of October comparison data in the report.” – CNBC
Their report emphasizes the silver lining of some CPI relief. Policymakers need to be on guard as they make their way through these perilous economic waters.
Historical Context and Formula Adjustments
Surprisingly, the methodology behind calculating CPI has largely changed since the 1990s. For the government, that’s when they quietly changed the CPI formula, resulting in a significant undercount of what prices were actually increasing. Applying the 1970s-favored formula would paint a significantly different picture of inflation. These current CPI figures could result in rates almost twice what the official rates are today.
This brief historical context should be a sober reminder to both economists and policymakers alike on how closely and perceptively inflation is measured. The latest numbers indicate real progress. While these are laudable steps, they do not accurately capture or address the pain consumers are experiencing from rising costs in their everyday lives.
Recent Trends in Core CPI
An analysis of the last five readings reveals consistent patterns in core CPI increases: 0.2, 0.3, 0.3, 0.2, and 0.2 percent respectively. These figures annualize to just under 2.9 percent over that time, putting it still above the Federal Reserve’s target.
The exact peak value was not revealed in this report, but CPI had its highest value in April 2022. Since then, those headline numbers have steadily ticked up. As we face stubborn inflationary burdens on all sectors of our economy, it’s not enough to simply stop here.