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4 key takeaways from the December CPI report

By Chris Miller

The Consumer Price Index report released by the Bureau of Labor Statistics on December 13 indicated that prices rose 0.1% on a seasonally adjusted basis in November, slower growth than the 0.4% of October. On the morning of the release, just days before the Federal Open Markets Committee would announce the latest round of interest rate hikes to continue battling inflation, David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy, and Wendy Edelberg, director of the Hamilton Project, discussed the latest figures.


The November CPI report was the second in a row to suggest that inflation was slowing. “This is the kind of report that the Federal Reserve has been looking for,” said Wessel. Inflation is still high at 7.1% over last year but, as Wessel said, “It doesn’t mean the inflation war is over, but today’s battle is a win for the forces against inflation.” Edelberg honed in on core CPI, which omits volatile food and energy prices and is a key indicator for Fed policymakers. Over the last three months, at an annualized rate, core CPI inflation has been just above 4%, she said, which sounds high compared to pre-pandemic levels, but is significantly lower than it was in recent months when it hovered around 6-7%. Four percent is only 1.5 percentage points above the Fed’s target for core CPI, she said. “That’s what I would call within spitting distance – you’d have to be a pretty good spitter, but within spitting distance … Having core CPI inflation a little above 4% suggests that we are close to the end of this tightening cycle that the Fed is going through.”


“This is the kind of report that the Federal Reserve has been looking for.”

Edelberg cited two reasons why goods prices have come down. The first is that supply chain issues over the last few years have eased. The second is that household spending on goods was far above trend during the height of the pandemic. “If you look at spending on goods relative to trend, it’s been 10% higher than trend, 15% higher than trends – these are just nutty numbers,” she said, but those numbers are now moderating. Even as goods prices have started to come down, service price inflation remained high, but Edelberg expects those prices to start falling more as well because of shelter costs: “Because of what we know is happening with rents, it looks like on the horizon lower services inflation is in store.”


While the markets were exuberant about the latest report, Wessel said that it wouldn’t change much for the Fed’s immediate plans. “I think there’s a sense that the Fed may not be going to relax now, but they may be preparing to relax next year, and they won’t have to force the economy into a recession in order to break the back of inflation. I personally think that’s a little overoptimistic, but this is definitely a bit of data that comes down on that side of the case,” he said. Edelberg agreed that the report wouldn’t lead to the Fed changing its plan to raise interest rates by 50 basis points at the December meeting (the Fed did raise rates the day after this conversation, as expected), but it will be a contributing data point to future decisions: “I think what this does is it puts a huge amount of pressure on CPI releases in that come out in the next two months, because the real question will be, do they continue to see moderating inflation without another rate hike after tomorrow?”

“We are spending money like there wasn’t a pandemic overall, but we have millions fewer people showing up wanting jobs. That’s just not sustainable.”


As far as impact on the labor market and the overall economy, Wessel and Edelberg agreed that the Fed would continue to try and cool the economy, even at the expense of wage growth. Wessel noted that at a recent Brookings event Federal Reserve Chair Jerome Powell specifically said that he thought wage growth was too high to meet the Fed’s inflation target and that he would continue to argue for tightening until the pace of wage growth has slowed. Edelberg noted that the very tight labor market is contributing to that wage growth, and that tight labor market is in part due to the still-strong spending: “We are spending money like there wasn’t a pandemic overall, but we have millions fewer people showing up wanting jobs,” she said. “That’s just not sustainable.”

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