- Inflation was up just 0.1% in the month of November, bringing the headline annual rate to 7.1%, down from 7.7% last month.
- Today the Fed has raised interest rates again, though the 0.50 percentage point increase is a less aggressive raise than the past four 0.75 percentage point increases.
- The ‘dot plot’ of the Fed members shows a median projection of the base rate hitting 5.1% by the end of 2023, before coming down in subsequent years.
Yes, inflation is still high. But it’s coming down, and that trend is picking up pace. The latest numbers have been released, showing that the consumer price index rose by just 0.1% in November.
That figure is behind the 0.3% which had been projected, and takes the annual rate down to 7.1%. That puts the headline rate at its lowest level since December 2021.
It was a simpler time. FTX was still a blue chip company, the Queen was still with us and Russia hadn’t yet invaded Ukraine. For investors, portfolios were still looking very healthy. Such sweet summer children we were, especially those invested heavily into crypto.
Since then, markets have crashed, inflation has soared, though a recession has surprisingly, not yet arrived.
But could this be a sign that things are starting to turn?
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Annual headline inflation rate falls for 5th straight month
The Consumer Price Index, the most broadly used measure of inflation in the United States, peaked at 9.1% in June. Since then it has come down slowly each month to hit its current level of 7.1%.
The good news is that the pace of this trend seems to be increasing, with prices rising just 0.1% in November.
Between July and August the headline annual rate fell by just 0.2%, the next month it declined just 0.1%, in October it was down 0.5% and the latest figure represents a 0.6% reduction over the previous month.
While the overall monthly inflation rate went up slightly, there were many sectors which saw prices fall. Food was up 0.5% for the month and apparel was up 0.2%, while gasoline went down 2% over the month.
In more bad news for the embattled Carvana, used car and truck prices fell a further 2.9% in November. Other falls were recorded in piped gas, which was down 3.5% and medical care services which fell in 0.7%.
There were no notable increases across any of the items measured by the U.S. Bureau of Labor Statistics. The biggest increase was experienced in fuel oil which went up by 1.7%. All in all, it’s some pretty good news for consumers.
Core inflation, which takes out the food and energy items which can be particularly volatile, was up 0.2% in November. While that’s slightly higher than the headline rate, it’s also the lowest increase since August 2021.
Further signs that we may be seeing the beginning of a turnaround.
Fed hikes rates by 0.50 percentage points
Which brings us to the Fed. The whole point of the recent major hike in rates has been in the pursuit of lower inflation.
When the Fed raises interest rates, it makes it more expensive for people and businesses to borrow money. For example, if you have a credit card with a variable interest rate, the interest rate you pay on your outstanding balance will likely go up when the Fed raises interest rates.
This can make it more difficult for people and businesses to take on new debt, which can help to slow the economy by reducing the amount of spending and investment that takes place.
In addition to making borrowing more expensive, higher interest rates can also make saving more attractive. When interest rates are high, people and businesses are able to earn more on their savings, which can encourage them to save more and spend less. This helps reduce demand for goods and services, which can help to bring down inflation even further.
With this goal in mind, they’ve raised rates by 0.75 percentage points at the past four meetings in a row. That’s a huge level of increase, and it’s the fastest pace of increases seen since the early 1980s.
As much as inflation looks like it’s beginning to mellow, the Fed isn’t likely to slow down too quickly. At 7.1%, inflation is still at a near 40 year high, so it’s not quite mission accomplished just yet.
Which is why we’ve still seen a big jump in rates this month, with the Fed increasing the central bank rate by 0.50 percentage points. This was in line with most analysts’ projections based on the released economic data and comments made over recent weeks by Fed chairman Jerome Powell.
Will interest rates go up further?
The current rate hike cycle is almost certainly not over. For as long as the rate of inflation remains high, the Fed is likely to continue to raise interest rates. They’ve made it clear that they plan to bring the headline rate down to the long term target of between 2-3%, which means they’ve got some way to go.
We’re likely to see rates continue to rise into the first half of 2023.
Jerome Powell confirmed as much in a press conference after the Fed’s announcement stating that, “We’ve covered a lot of ground and the full effects of our rapid tightening so far are yet to be felt. We have more work to do.”
From there, it will depend on how the inflation rate responds. If it comes down rapidly as some are predicting, we could see the Fed keep rates steady, or even drop them in Q2/Q3. With that said, if inflation remains stubbornly high then rates will almost certainly continue to increase towards the back half of 2023.
After each Fed meeting, the individual members are surveyed on what they believe rates are likely to be in the future. This is known as the ‘dot plot’. Almost all members believe that the base rate will head over 5% in 2023, with some suggesting it could reach close to 6%.
From there, the general consensus is for rates to come back down below 5% in 2024, then a median prediction of 3.1% predicted in 2025.
What does all this mean for investors?
In reality, none of this is unexpected. As a result, markets haven’t responded much to the news. The positive takeaway for investors is that the Fed members believe that inflation is going to be brought under control in 2024, which is a good outcome for both businesses and consumers.
When the news starts to turn, it wouldn’t be surprising to see the stock market do the same. For investors this could mean that 2023 is a better year than what has been a terrible 2022, though of course nothing is guaranteed.
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