The CPI rose 0.4 percent in November as energy prices rebounded. Core inflation was noticeably softer at 0.1 percent, but was held down by weakness in more volatile components like airfare, lodging and apparel.

Firmer Headline Inflation

Consumer price inflation firmed in November with the consumer price index (CPI) rising 0.4 percent. That pushed the year-ago rate up to 2.2 percent compared to 1.7 percent last November.

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Headline inflation was lifted by higher energy prices in November. Gasoline prices have typically fallen this time of year, but rose this November leading to a seasonally adjusted gain of 7.3 percent. Food prices, on the other hand, were unchanged. Grocery prices edged down amid lower prices for proteins, beverages and fruits & vegetables, which offset a 0.2 percent increase in the price of food away from home.

Core Inflation Softer on Lodging, Airfare and Apparel

While the headline gain was in line with expectations, the 0.1 percent rise in core inflation was weaker than anticipated. Core services rose 0.2 percent, which marked a slowdown from the previous month. The weaker outturn was in no small part driven by some of the more volatile components of core services, including lodging away from home (down 1.3 percent) and airline fares (down 2.4 percent). Another notable standout, however, was a 0.8 percent decline in physician services, which along with wireless services, was a major contributor to the slowdown in core inflation earlier this year.

After increasing in October, core goods prices fell 0.1 percent. The decline was largely traceable to a 1.3 percent drop in apparel prices – the largest monthly decline in nearly 20 years as holiday discounting looks to have gotten an earlier start this year. In contrast, prices for autos and prescription drugs rose in November.

Pickup in Core Inflation Supportive of More Fed Tightening

Fed officials have been concerned this year about the slowdown in core inflation that began last spring. Core inflation has been picking up on trend, with the three-month annualized rate coming in at 1.9 percent. That should push up the year-over-year rate, which edged back down to 1.7 percent last month. With much of the weakness in November core inflation coming from the more volatile components, we continue to expect inflation to trend higher in the coming months.

Today’s FOMC meeting is almost certain to conclude with another 25 bps increase in the fed funds rate. Additional rate hikes in 2018, however, are likely to hinge on further gains in inflation. The Fed’s preferred measure of core inflation, the PCE deflator, has reached or surpassed the Fed’s 2.0 percent target in only five months of the current expansion, leaving a number of committee members worried about the persistent shortfall. As inflation should more clearly pick up in the coming months, we expect the FOMC will continue on with its gradual pace of tightening in the year ahead.

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