US inflation lower at 3.1% in November, led by food and fuel inflation

13 Dec 2023 , 02:51 PM

US inflation falls marginally; helped by fuel and food

The latest consumer inflation print for the US economy for the month of November 2023 has come in marginally lower at 3.1%. That is 10 bps lower than the 3.20% inflation reported in October 2023, but a full 60 bps lower than the 3.70% yoy inflation reported in the months of August and September 2023. Even as the inflation has receded sharply in the last two months, the hawks in the FOMC (like Jerome Powell and Michelle Bowman) are far from pleased about the gap from the target of 2%. Notwithstanding the dovish optimism of the CME Fedwatch, the Fed has continued to maintain its stance that rate hike options were still open and rate cuts were not even being considered at this point of time.

In a sense, the US consumer inflation must be seen in conjunction with the Fed policy, which has maintained status quo on rates in 3 out of the last 4 policies. The Fed wants the lag effect to play out on inflation, but more importantly, the Fed is worried that too much tightness may result in a hard lending for the Indian economy. There are still  two concerns for the Fed in this data. Firstly, the core inflation has remained flat at 4%, which means structural issues are still rampant. The fall in headline inflation was an outcome of a combination of lower food inflation and sharply lower fuel inflation. Secondly, with the tensions in West Asia and OPEC supply cuts, Fed feels oil could still surprise on the upside.

Food and energy inflation fall; core inflation flat in November 2023

The 10 bps fall in inflation may not really set the equity and bond markets on fire. After all, the markets were hoping that the consumer inflation for November may touch 3% or even dip below that. However, inflation at 3.1% is only marginally lower in November 2023.

Inflation Basket Category	Nov 2023 (YOY)	Oct 2023 (YOY)	Inflation Basket Category	Nov 2023 (YOY)	Oct 2023 (YOY)
Food Inflation	2.90%	3.30%	Core Inflation	4.00%	4.00%
Food at home	1.70%	2.10%	Commodities less food and energy	0.00%	0.10%
Cereals and bakery products	3.40%	4.20%	Apparel	1.10%	2.60%
Meats, poultry, fish, and eggs	0.10%	0.40%	New vehicles	1.30%	1.90%
Dairy and related products	-1.40%	-0.40%	Used cars and trucks	-3.80%	-7.10%
Fruits and vegetables	0.40%	1.10%	Medical care commodities	5.00%	4.70%
Non-alcoholic beverages	2.90%	3.30%	Alcoholic beverages	2.90%	3.70%
Other food at home	3.30%	3.60%	Tobacco and smoking products	7.70%	7.20%
Food away from home	5.43%	5.40%	Services less energy services	5.50%	5.50%
Full service meals and snacks	4.30%	4.30%	Shelter	6.50%	6.70%
Limited service meals	6.00%	6.20%	Rent of primary residence	6.90%	7.20%
Energy Inflation	-5.40%	-4.50%	Owners’ equivalent rent	6.70%	6.80%
Energy commodities	-9.80%	-6.20%	Medical Care Services	-0.90%	-2.00%
Fuel oil	-24.80%	-21.40%	Physician Services	-0.70%	-1.20%
Gasoline (all types)	-8.90%	-5.30%	Hospital Services	6.30%	N.A.
Energy services	-0.10%	-2.30%	Transport Services	10.1%	9.20%
Electricity	3.40%	2.40%	Motor vehicle Maintenance	8.50%	9.60%
Natural gas (piped)	-10.40%	-15.80%	Motor vehicle insurance	19.20%	19.20%
Headline Consumer Inflation	3.10%	3.20%	Airline Fare	-12.10%	-13.20%

Data Source: US Bureau of Labour Statistics

The above food basket would be key to the decision by the Fed. It now looks like another rate hike may be put off for now, especially with the sharp fall in food and fuel inflation. Incidentally, the Fed meeting concludes on 13th December and the Fed policy statement will be announced late on Wednesday. The broad consensus is that the Fed would maintain status quo on rates for now. Here are some quick takeaways.

• Between July 2023 and September 2023 headline inflation spiked from 3.2% to 3.7%. This was despite the food inflation falling by 120 bps from 4.90% to 3.70% on yoy basis. In October 2023, the food inflation has tapered further to 3.30%, while the headline inflation was lower by 50 bps to 3.2%. November has seen a marginal fall to 3.1%.

   

• It is the components of the food basket that is interesting. Except food away from home, all the other components of the food basket are lower than October. The steepest fall was visible in the food basket in cereals, dairy products, and fruits & vegetables.

   

• The real action was in the energy basket. After dipping to the level of -4.5% in October, the energy basket inflation deflated further to -5.5%, largely on the back of Brent Crude prices and WTI prices falling sharply amidst higher supply from non-OPEC producers.

   

• Core inflation has remained flat in November, after easing by 10 bps to 4.00% in October 2023. In the two months prior to that, the core inflation had fallen a steep 60 bps from 4.70% to 4.10%. Above all, the core inflation at 4% for October and November 2023 is the lowest level of core inflation in the last 28 months. However, it must be noted that the Fed actually relies on the PCE (personal consumption expenditure) inflation announced at the end of the month, rather than the consumer inflation by BLS.

MOM inflation inches up from 0.0% to 0.1% in November

The US Bureau of Labour Statistics (BLS) reports inflation on yoy basis, as well as on MOM high frequency basis. Here is the month-on-month (MOM) inflation for last 6 months.

Month	Food (MOM)	Fuel (MOM)	Core (MOM)	Inflation (MOM)
Jun 2023	0.1%	0.6%	0.2%	0.2%
Jul 2023	0.2%	0.1%	0.2%	0.2%
Aug 2023	0.2%	5.6%	0.3%	0.6%
Sep 2023	0.2%	1.5%	0.3%	0.4%
Oct 2023	0.3%	-2.5%	0.2%	0.0%
Nov 2023	0.2%	-2.3%	0.3%	0.1%

It is interesting to see how the headline MOM inflation has panned out. Between July and August 2023, MOM inflation spiked from 0.2% to 0.6% but tapered back to 0.4% in September and further to 0.0% in October. In November, the MOM inflation has inched up marginally to 0.1% with pressure coming from MOM core inflation.

1. MOM food inflation in October 2023 rose higher at 0.2%. A total of 4 out of the 6 store food categories saw higher inflation. Cereals & bakery spiked 0.5%, fruits & vegetables 0.3%, and non-alcoholic beverages 0.5%. Meat & poultry were subdued in the month.

    

2. Energy index gained from -2.5% MOM in October 2023 to -2.3% in November 2023. Again, it was a case of energy commodities still deflating but some element of bounce seen in the energy services space.

    

3. Core inflation growth was higher at 0.3% in November 2023 compared to 0.2% MOM in October 2023.  The inflation pressure comes largely from shelter, which was the big driver of MOM core inflation. Used cars saw a sharp spike of 1.6% MOM. Apparel saw negative growth in MOM inflation

What we read from the November 2023 US consumer inflation

Here are some key points that we gathered from a reading of the US consumer inflation report for October put out by the Bureau of Labor Statistics (BLS). 

• For the month of November 2023, the yoy Consumer Price Index (CPI inflation) came in at 3.1%. This is a good 60 basis points lower than the 3.7% yoy inflation recorded by the US economy for the month of August and September. Food and energy were down, while core inflation was flat on yoy basis. 

   

• US consumer price inflation cooled less than expected. The street expectation was that consumer inflation for November 2023 would come in at 3.0% or even lower, but actual consumer inflation for November came in at 3.1%. This is likely to leave the Fed top bosses wondering about how to bring inflation down rapidly to the 2% mark.

   

• While the yoy inflation was lower than the consensus, the MOM inflation came in slightly higher at 0.1% in November compared to 0.0% in October 2023. MOM inflation is a good lead indicator of yoy inflation in the long term.

   

• The energy prices dropped significantly in the month of November 2023 by 100 bps on a yoy basis. However, the energy inflation, albeit negative, was higher in November on the back of a spike in the price of energy services.

   

• While the food inflation was sharply lower by 40 bps at 2.90% in November 2023 compared to 3.30% in October 2023, what really matters is that the level of food inflation currently on a yoy basis has not been so low since the middle of 2021. 

   

• While the core inflation on a MOM basis was marginally higher at 0.3%, the yoy core inflation came in flat at 4%. This is the structural side of inflation basket, excluding food and energy. The yoy core inflation of 4% is the lowest since September 2021.

   

• Is the Fed really happy? Not the hawks in the Fed for sure! To be fair, the fall in inflation is just the reversal of the spike in inflation seen since July 2023. Also, the consumer inflation at 3.1% is still a full 110 basis points away from the Fed target of 2%. That is why, the Fed still feels that despite the fall, inflation is still too high for comfort. However, the growth considerations have forced the Fed to go slow on rate hikes.

   

• In a sense, the American households are caught between the devil and the deep sea. High inflation and high interest rates are both pinching their budgets. Most are looking at this fall in CPI inflation for October as a mere slowing of pace. However, the base speed still continues to be very high.

   

• Economists have consistently pointed out that the real problem is not the inflation or the interest rate action, but the tightness in the labour market. Now, a tight labour market entails robust wage growth and sustained spending by US households. In fact, data suggests that the US households continue to spend even amidst tightness and as long as this sustains, inflation will be a tough monster to control. 

To cut a long story short, the fall in inflation reflects the slowing of pace but inflation is still moving at high base speed. That is the challenge that the Fed has to contend with. 

Will Fed call off rate hikes; and what will RBI do?

There are two questions, so let us first address the Fed question. The Fed is unlikely to change its stance or use a more dovish language with the long gap to target inflation. Fed officials had prematurely celebrated when consumer inflation had fallen to 3% in June. However, since then inflation in the US spiked all the way to 3.7%, before normalizing again to 3.2% in October 2023 and further to 3.1% in November 2023. The policy stance would still be cautious as target rates of 2% are 110 bps away. Fed would wait till headline inflation decisively moves towards 2% and core inflation moves below 3%. Of course, the reference point would still be the PCE inflation for the US Fed. Rate hikes may be calibrated but rate cuts are not going to be debated for now.

For the RBI, the US consumer inflation will be a key input as it grapples with rising food inflation in India. In the last few months, the overall headline inflation had fallen from 7.44% to 4.87%, but it still remains well above the RBI median inflation target of 4%. Wit the November India inflation at 5.5%, India again has a food inflation problem on hand. Currently, the RBI is on wait-and watch mode. RBI has to not just manage price stability but also to manage inflation expectations. Indian inflation expectations have been reined in the past, when the RBI has stood up to subdue inflation by making money dearer.

The good news for the RBI is that the FPI flows are back with a bang into India and that is likely to hold the rupee up and reduce the risk of imported inflation. RBI, obviously, already has a Plan-B in place. Rising rates in the US amidst low inflation and static rates in India amidst rising inflation; is not a very healthy combination. That is the kind of situation that the RBI would desperately want to avoid.