Tuesday’s November inflation readings were a welcome pre-holiday gift. But hold off on excessive celebrations.
The headline consumer price index rose 0.1%, down from 0.4% in October. Twelve-month CPI fell to 7.1%, the smallest increase since December 2021, according to Bureau of Labor Statistics (BLS) data.
Price declines came in used cars and trucks, IT devices like smartphones, and recreational goods such as video and audio products. However, inflation in groceries and restaurant bills and some services have proven more resistant.
“While inflation is still unacceptably high, it is clearly dropping due to the lag effect of the [Federal Reserve] rate hikes implemented this year,” commented Matt Peron, director of research at Janus Henderon Investors, in an email. “This aligns with what we hear from management teams in that the inflationary pressures are loosening.”
Indeed, Deloitte’s Q4 CFO Signals Survey, out Wednesday morning, showed only about 20% of surveyed finance chiefs concerned about persistent inflation, but 33% worried about a potential recession.
Additionally, 54% of the 126 responding CFOs did not believe inflation would impact their costs to the same degree next year as they did as in 2022.
In earnings calls, large company executives have previously hinted that supply chains are working again and price increases stabilizing.
“[The] inflationary environment has driven massive annual cost increases and has taken a significant toll on both our cash flow as well as our operating earnings,” said Wade Miquelon, CEO of retailer JOANN, on the retailer’s third-quarter earnings call. “Fortunately, we are seeing stabilization across our cost structure and deflationary opportunities are now arising based on healing supply chain, stabilized commodity prices, and the strength of the dollar.”
Costco CFO Richard Galanti, on the company’s December 8 earnings call, said it sees a little light at the end of the tunnel, “but it’s still little,” according to the S&P Capital IQ transcript. “Commodity costs are mostly coming down, whether it's corn flour, sugar and butter, or even some things like steel,” he said, but “food and sundries are still up more than nonfoods.”
In the overall economy, the price indexes for shelter, including rents and recreation services (club memberships and tickets to sporting events, for example), remain elevated. Services inflation, which has steadily increased all year, was 0.3% in November, for an unchanged 12-month increase of 7.2%.
The November CPI release “generally affirms the message that inflation is broadly turning in components outside of shelter,” according to a note from BofA Securities economists. “This suggests that Fed messaging is probably past peak hawkishness as we see a downshift in the pace of hikes and approach [the] terminal [Fed funds rate].”
A Long Way to Go?
But it’s not certain that the Federal Reserve Open Market Committee will be able to wrestle inflation down to its 2% target next year, or even in 2024, especially given that the U.S. labor market is still tight.
The average pay raise for U.S. workers is projected to be 4.6% for 2023, according to Willis Towers Watson, a percentage point above the level Fed Chair Jerome Powell sees as "being compatible with 2% inflation,” according to the Associated Press.
Nearly three-quarters (74%) of CFOs surveyed by Deloitte expected talent/labor costs to increase substantially in the year ahead.
As far as inflation projections, professional forecasters in the Philadelphia Fed survey projected a median headline CPI of 4.5% next quarter.
U.S. households think inflation will remain higher — they predict a 5.2% reading over the coming 12 months, according to the New York Fed’s Survey of Consumer Expectations.
If inflation remains that stubborn, CFOs could be waiting well into 2023 for the Federal Reserve Open Market Committee to end its cycle of rate hikes.