U.S. Consumer Prices Rise in November

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. consumer prices increased by the most in seven months in November, but that is unlikely to discourage the Federal Reserve from delivering a third consecutive interest rate cut next week against the backdrop of a cooling labor market and rising rental costs.

Most of the rise in inflation reported by the Labor Department on Wednesday stemmed from higher food prices and more expensive motel and hotel rooms. Rents, a major inflation driver, increased at the slowest pace since July 2021, which is positive for the inflation outlook.

"The data have given the Fed the 'all clear' for next week, and today’s inflation data keep a January cut in active discussion," said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management.

The consumer price index (CPI) rose by 0.3% last month, the largest gain since April, having advanced 0.2% for four consecutive months, according to the Labor Department's Bureau of Labor Statistics.

A 0.3% increase in shelter costs, which include hotel and motel rooms, accounted for nearly 40% of the rise in the CPI. Shelter costs rose 0.4% in October. The cost of lodging away from home surged 3.2% after climbing 0.4% in October.

Food prices rose by 0.4%, following a 0.2% increase in October, with grocery store prices rising 0.5%. The cost of eggs soared 8.2% due to an avian flu outbreak.

Beef prices also increased, while nonalcoholic beverages became more expensive. In contrast, prices for cereals and bakery products fell by 1.1%, marking the most significant decline since tracking began in 1989.

Year over year, the CPI climbed 2.7%, up from 2.6% in October, aligning with economists’ expectations. The annual inflation increase has slowed significantly from a peak of 9.1% in June 2022. Despite this, progress in lowering inflation to the Fed’s 2% target has almost stalled recently.

The Fed is shifting focus to the labor market. Job growth picked up in November following restrictions caused by strikes and hurricanes in October, but the unemployment rate inched up to 4.2% from 4.1% for the previous two months.

Core Inflation Stagnates

Excluding the volatile food and energy components, the CPI increased by 0.3% in November, consistent for the fourth month running.

Rents rose by 0.2%, representing the smallest gain since July 2021. Owners' equivalent rent, reflecting what homeowners pay or earn from renting their property, also rose by 0.2%, the smallest gain since April 2021.

In the 12 months ending in November, the core CPI gained 3.3%, matching the advance in October.

Although there has been little progress in tackling inflation, investors found solace in the moderation of rent costs and the stability of core inflation.

Yields on longer-dated U.S. Treasuries fell after the report was released, and the dollar remained steady against a basket of currencies.

Financial markets have almost fully priced in a quarter-percentage-point rate cut at the Fed's Dec. 17-18 policy meeting, according to CME Group's FedWatch Tool—previously, the odds were around 86%.

Next year, fewer rate cuts are expected than earlier projections. Although slower inflation is anticipated next year as rent costs cool and labor market slack increases, tariffs and potential mass deportations promised by President-elect Donald Trump could offset these benefits.

"From a fundamental standpoint, we do not see significant upside risk to inflation," stated Stephen Juneau, an economist at Bank of America Securities. "That said, progress on inflation should stall next year due to anticipated changes to tariffs, fiscal, and immigration policies."

The Fed initiated its monetary policy easing cycle in September. The current benchmark overnight interest rate range is 4.50%-4.75%, having been raised by 5.25 percentage points from March 2022 to July 2023 to combat inflation.