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A holiday gift for consumers: Inflation falls for the first time since April 2020

Inflation fell in November for the first time since early 2020, when the COVID-19 pandemic was slamming the U.S. economy. The decline signals that the Federal Reserve’s flurry of interest rate hikes is continuing to put pressure on inflation, which hit a 40-year high last year.

The Fed’s preferred measure of inflation, personal consumption expenditures (PCE), showed that consumer prices slid 0.1% last month from October, the Commerce Department said on Friday. That marks the first month-over-month drop since April 2020, while the year-over-year increase — up 2.6% from November 2022 — was less than economists had forecast.

“The broad-based disinflation now moving through the economy should result in further relief in overall inflation,” Joe Brusuelas, U.S. chief economist with RSM, said in a report.

All the numbers show somewhat more progress against inflation than economists had expected. Inflation is steadily moving down to the Fed’s year-over-year target of 2% and appears to be setting the stage for Fed rate cuts in 2024.

After nearly two years of Fed rate hikes — 11 since March 2022 — inflation has come down from the four-decade highs it hit last year. The Labor Department’s closely watched consumer price index was up 3.1% last month from November 2022, down from a 9.1% year-over-year increase in June 2022.

“[C]ore inflation has been running at an annualized pace of just 1.9%,” noted Capital Economics in a Friday research note. “Adding in the further sharp slowdown in rent inflation still in the pipeline, it’s hard to see any credible reason why the annual inflation rate won’t also return to the 2% target over the coming months.”

Excluding volatile food and energy prices, so-called core inflation last month rose 0.1% from October and 3.2% from a year earlier.

The PCE, which showed year-over-year inflation peaking at 7.1% in June 2022, is preferred by the Fed over the Labor Department’s CPI in part because it accounts for changes in how people shop when inflation jumps — when, for example, consumers shift away from pricey national brands in favor of cheaper store brands.

Federal Reserve rate cuts

Encouraged by the progress, the Fed has decided not to raise rates at each of its last three meetings and has signaled that it expects to cut rates three times next year.

“A sustained easing in price pressures will support a shift in the (Fed’s) policy stance next year, from holding rates steady to lowering them over time,” Rubeela Farooqi, chief U.S. economist at High Frequency Economics, said in a report. “The exact timing will depend on how the labor market, inflation and growth will evolve next year. Based on our forecasts, we expect the Fed to start cutting rates by the middle of next year.”

Despite widespread predictions that higher rates would cause a recession, the U.S. economy and job market have remained strong. That has raised hopes the Fed can achieve a “soft landing” — bringing inflation to its 2% year-over-year target without sending the economy into recession.

Friday’s report also showed that consumer spending rose 0.2% last month after rising 0.1% in October. Personal income rose 0.4% last month, a tick up from 0.3% in October.

“Despite persistent headwinds, consumers are still showing willingness to spend as they regain some lost purchasing power amid cooling inflation and resilient labor market trends,” noted EY Senior Economist Lydia Boussour told investors in a research note.

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