US November inflation tapers to 7.1% on sustained hawkishness

Interestingly, this inflation data comes in exactly a day ahead of the last Fed meeting of 2022, which will conclude on 14th December. There are already indications from the Fed (including from Jerome Powell) that the Fed would look to tone down the aggression from December itself. It may be recollected that between May 2022 and November 2022, the Fed had hiked rates by 75 bps on 4 occasions in succession. Since March 2022, the Fed rates are up a full 375 basis points from the range of 0.00%-0.25% to 3.75%-4.00%.

In October 2022, consumer inflation had fallen below 8% for the first time since February. Now November inflation is lower by another 60 bps at 7.1%. Consumer Inflation had touched a peak of 9.1% in June 2022 and then tapered to 8.5%, 8.4%, 8.2% and 7.7% between July and October. November has seen a rather sharp fall in the consumer inflation to 7.1%. If one looks at the break-up of consumer inflation in November, there has been a perceptible fall in food inflation and energy inflation, even as lower core inflation stays persistent around the 6% mark. The chart captures consumer inflation trend in the US. The blue line shows headline inflation while red line captures core inflation trend over 1 year.

Chart Source: US Bureau of Labour Statistics

Broadly, the yoy inflation was lower across all the 3 major categories viz. food inflation, energy inflation and core inflation; although it has been most pronounced in energy inflation. For instance, Food inflation fell by 30 bps from 10.9% in October 2022 to 10.6% in November 2022. During the same period, energy inflation fell 450 basis points from 17.6% to 13.1%. Even core inflation tapered by 30 bps from 6.3% to 6.0% over last month. Over the last 2 months, core inflation has fallen by 60 basis points, which is a good sign.

US consumer inflation falls 200 bps from June peak

Headline consumer inflation in the US has fallen 200 basis points from the peak of June 2022. However, the impact of cumulative rate hikes will translate into a quicker fall in consumer inflation in the coming months. In November, all 3 heads of inflation are lower. However, food inflation and core inflation continue to remain elevated by historical levels, due to supply chain bottlenecks.

While energy prices are sharply lower in the last 6 months, the concern is that the tapering of energy inflation is more due to recession fears than a genuine fall in price. There are two major risks to energy inflation. Firstly, OPEC will try and keep Brent Crude prices in the range of $90-$100/bbl, so more supply cuts are likely. Secondly, EU sanctions have kicked in on Russia, so it will all depend on how Europe manages the oil and energy gap?

Data Source: US Bureau of Labour Statistics

There are a few broad trends emerging. Firstly, food inflation has fallen on a yoy basis, but remains 0.5% higher on a sequential basis. In the food basket, vegetables and fresh fruits saw lower inflation while high protein items like meat and dairy products saw a spike in inflation. Food basket is still subject to supply side constraints. Secondly, under the energy category, the fall in energy inflation has been driven by the sharp fall in gasoline prices and natural gas. Lastly, core inflation has tapered, but the pressure is still coming from fuel related services like energy services, airline fares and transport related services.

High frequency inflation back to August 2022 levels

The US Bureau of Labour Statistics (BLS) reports inflation on a yoy basis, as well as on a MOM high frequency basis. The chart below captures the trend of MOM inflation over last one year. After touching a high of 1.3% in June, it fell to 0.0% in July 2022. While MOM inflation spiked in September and October, it has moderated in the month of November 2022 to 0.1% on a seasonally adjusted basis.

Chart Source: US Bureau of Labour Statistics

Here are key takeaways from the MOM inflation data for November 2022.

1. MOM food inflation increased 0.5% with 4 out of 6 heads of groceries up. Inflation was higher for fruits, vegetables, cereals and bakery but lower for meat and poultry.
2. Energy index fell -1.6% MOM in November after bouncing in October. Gasoline and natural gas were lower on MOM basis while fuel and electricity were higher.
3. Core inflation rose 0.2% MOM in November 2022. Pressure is coming from rent and shelter and fuel dependent services, while cost of medical care tapered.

 
Strong case for Fed to go slow on rate hikes

Ahead of the FOMC statement expected to be announced on 14th December, it almost looks like a fait accompli that the Fed would restrain itself to 50 bps rate hike. That is logical after 4 rounds of 75 bps each. There are several factors that could trigger a tapering of the hawkishness. Firstly, headline inflation is down 200 bps from the June 2022 peak.

Secondly, after 2 quarters of GDP contraction, the GDP expanded in Q3-2022. The US would not want to miss out on this growth momentum. In December 2022, Fed will have incentive to hit the pause button and restrict hikes to just 50 bps. Anything lower would be icing on the cake for the markets. With Fed rates likely at 4.5% after the December hike, the terminal rate may still be about 100 bps away. Rate hikes are not yet over, for now.

How will the US inflation data impact India? RBI has already tapered its rate hike from 50 bps to 35 bps in December. Fed has indicated that it would restrict rate hikes in December to 50 bps. However there is lack of clarity on terminal rates in the US and in India. But one thing is clear. For the US and India, the relentless and single-minded pursuit of inflation control is over. Now, the focus will be equally on growth too. For India, the immediate positive takeaway of a change of heart at the Fed is that export constraints faced by India should start to ease. That is the good news!