November CPI

Inflation as measured by the CPI is up in November. Month-over-month, the all-items CPI inflation rose from 2.97% in October to 3.82% in November. A more modest rise in this measure of inflation was recorded on a year-over-year basis, from 2.58% (October) to 2.73%. Our measure of trend CPI inflation popped up half a percentage point, from 2.31% to 2.81%. As we have emphasized in the past, our trend measure is smoother than the monthly inflation rate while at the same time responding in a more timely fashion to changes in trend than the annual inflation rate.

The situation is broadly similar when looking at inflation based on core CPI (excluding food and energy). While the year-over-year core CPI inflation rate is essentially unchanged at 3.30%, the month-over-month rate rose from 3.42% to 3.76%. Our trend measure is up nearly 0.2 percentage points, from 3.18% to 3.37%.

While, the FOMC mainly focuses on inflation as measured by the core PCE price index, this measure of inflation, and that measured by the CPI, tend to move together. The best that can be said of the November CPI report is that year-over-year core CPI inflation was unchanged. This observation is of little comfort given that October’s year-over-year core PCE inflation rate was 2.80% — well above the Fed’s stated 2% target. In an earlier post on the October PCE inflation results, we pointed out that comments from FOMC members have raised expectations for a December rate cut; given the negative inflation picture painted by the October PCE, we asked whether the committee would defy those expectations. As we see it, inflation has not been brought to heel. Our recommendation: no change in the Fed funds rate target at the December meeting, and start preparing the public for the possibility of raising this rate in the future to bring inflation well and truly down to target.

November Employment Roars back

by paul gomme and peter rupert

The BLS announced that payroll employment increased 227,000 in November. In addition, October’s estimate was revised up 24,000 and September revised up 32,000. The private sector rose 194,000 after actually shrinking 2,000 in October.

The private service sector gained 160,00, led by the health care and social assistance sector, increasing 72,300. The largest sectoral loss was in retail trade, shedding 28,000 jobs and has had declining employment in 3 of the last 6 months.

Average weekly hours of work rose from 34.2 to 34.3, meaning that total hours of work increased 0.4%. Average hourly earnings increased 0.3%, from $35.48 to $35.61.

The household survey, on the other hand, painted a much weaker picture. By this measure, employment fell 355,000 and the labor force declined by 193,000, leading to a decline in the participation rate to 62.5 from 62.6. The unemployment rate ticked up slightly from 4.15% to 4.25%.

Overall, this was a solid jobs report. The strength of the labor market leaves the FOMC in a bit of a pickle. Markets have priced in a 25 bp cut this month, perhaps encouraged by recent remarks by Fed Governor Christopher Waller. Yet, the real economy is strong and inflation has been inching up over the last several months. Having built expectations of a rate cut, is the FOMC willing to disappoint markets in light of the new data?