The Department of Labor announced last Tuesday that the Consumer Price Index (CPI) rose by 0.1 percent in November and 3.1 percent in the past 12 months. Core CPI, which excludes volatile food and energy, rose 0.3 percent in November and 4 percent in the past 12 months. Food prices rose 0.2 percent, and energy prices declined 2.3 percent, due largely to a 6 percent decline in gasoline prices. Natural gas and propane prices rose 2.8 percent in November due largely to colder weather. Owners’ equivalent rent (shelter costs) rose 0.4 percent in November and 5.5 percent in the past year. This was a bit disappointing, so the Federal Reserve will keep rates steady until inflation approaches its target of 2 percent.
On Wednesday, the Labor Department announced that the Producer Price Index (CPI) was unchanged in November, and rose only 0.9 percent in the past 12 months. Core PPI, which excludes food, energy, and trade, rose just 0.1 percent in November and 2.5 percent in the past 12 months. Wholesale food prices rose 0.6 percent, and energy prices declined 1.2 percent in November. Wholesale service costs rose 0.2 percent, while goods rose 0.1 percent. The PPI report was positive, reflecting inflation well under the Fed’s 2 percent target rate, balancing out the higher CPI.
After these two reports came out, at the December meeting of the policy-making Federal Open Market Committee (FOMC), the Fed revealed that the “dot plot” from all 17 FOMC voting members foresee three rate cuts in 2024. Furthermore, three to four more rates cuts are anticipated in 2025, until the federal funds rate hits 3.5–3.75 percent. In total, the FOMC dot plot revealed six to seven key interest-rate cuts planned for the next two years. However, if the Fed wants to stay out of the 2024 political arena, perhaps the FOMC might want to start earlier and make the most of these interest-rates cuts before the November presidential election. Also notable is that Treasury yields plunged after that FOMC announcement, so the 10-year Treasury bond now yields just 3.93 percent, down more than 100 basis points from a peak of 4.99 percent on Oct. 19.
In his press conference after the FOMC statement, Fed Chairman Jerome Powell said he would not even wait until the Fed’s favorite inflation indicator, the Personal Consumption Expenditures (PCE) price index, hits 2 percent, for fear of “overshooting” on the downside and risking deflation, so the Fed may cut rates sooner. The monthly CPI increases were the largest last year from January to May 2023, at 0.41 percent, 0.45 percent, 0.38 percent, 0.41 percent, and 0.44 percent, respectively. Once these large gains are past, gains ranged from 0.18–0.32 percent in the second half, so 12-month gains will be lower.
Chairman Powell’s press conference on Wednesday was closely scrutinized, but for once Mr. Powell stuck to the FOMC script and strived to reassure his audience that inflation was cooling off fast.
Also, in a Wall Street Journal interview last Tuesday, Treasury Secretary Janet Yellen argued for a “soft landing,” of which she described as “the economy continues to grow, the labor market remains strong, and inflation comes down.” Regarding inflation, Ms. Yellen added, “I see no reason, on the path that we’re currently on, why inflation shouldn’t gradually decline to levels that are consistent with the Fed’s mandate and targets.” I should add that my favorite economist, Ed Yardeni, last week praised Ms. Yellen for managing the recent Treasury auctions better, allowing the long-term Treasury bond yields to continue to decline.
The European Central Bank (ECB) followed the Fed’s lead last week by not changing its key interest rate. However, the HCOB Flash Eurozone Composite PMI Output Index, which is a gauge of activity in the eurozone manufacturing and services sectors, fell to 47.0 from 47.6 in November, the seventh straight monthly decline. Since any reading below 50 signals a contraction, the eurozone economy is sputtering.
In other economic news, the Department of Commerce announced on Thursday that retail sales rose 0.3 percent in November, substantially more than the consensus estimate of a -0.1 percent decline. Excluding vehicle and gasoline sales, retail sales rose by a more impressive 0.6 percent, which is way above the 0.1 percent increase in October. In the past 12 months, retail sales have risen 4.1 percent. Spending at bars and restaurants surged 1.6 percent in November, which is always a good sign, demonstrating that consumers are getting out and about.
I expect some upward GDP revisions due to rising November retail sales. Sure enough, the Federal Reserve Bank of Atlanta revised its fourth-quarter GDP estimate up from 1.2 percent previously to a 2.6 percent annual pace.
