Fed Keeps Lending Rates Steady as Inflation Drops to 3.1%

The Fed also indicated it may be done raising interest rates for some time.

A key factor in the decision appears to be the Bureau of Labor Statistics’ latest data on inflation. In the report released on December 12, the BLS reported that the annualized rise in the Consumer Price Index as of the end of November was 3.1%. That’s down from the previous month’s 3.2%. It also comes with enough trend data to suggest prices are now very much under control in the country now.

Consumer Price Index Changes by Category

Food prices continued to rise this time, but only by 0.2% compared to October’s 0.3%.

A major contributor to that was the food at home index, which is tied to grocery items for the most part. It was up just 0.1% in November, for a factor of three decline from October’s 0.3% value. At the high end of price changes in this category were cereals and bakery products, which rose by 0.5% last month; nonalcoholic beverages, which were up by 0.5%; and the fruits and vegetables area which saw increases of 0.3%. At the low end of the increases were the dairy and related products, which rose only 0.1% for the month. Prices of meats, poultry, fish, and eggs all declined last month, mostly driven by lower costs of pork, chicken, and beef products. Other food at home came down by 0.1% from last month as well.

These changes made the last twelve months fairly stable for food at home. Prices overall rose by 1.7% for the year ending November 30.

The food away from home part of the food category rose by a substantial 0.4% in November. Full-service meal prices were up 0.5% overall across the country and limited-service meals (fast food) went up by 0.4%. Prices for food away from home rose by an overall 5.3% for the year, with limited-service meals – which rose overall by 6.0% for the year – driving most of that increase. In contrast, full-service meals were up by just 4.3% for the last twelve months.

The continuing decline in the cost of oil helped push the energy price index down by 2.3% last month. That is on top of October’s net energy prices drop of 2.5% overall.

Gasoline price declines were the biggest factor here. They were down by 6.0% this month, following a 5.0% fall in October.

Fuel oil costs were also down, by 2.7%. In contrast, natural gas prices jumped by 2.8%, up significantly from October’s 1.2% increase.

Electricity prices were up by 1.4% for the month. That too represented a steep rise compared to October’s 0.3%.

Over the last year, energy prices fell overall at a 5.4% rate. The biggest overall drop within this category was in fuel oil prices, which came down by 24.8%. Natural gas, which decline by 10.4%, came in second. Gasoline prices were down by 8.9% for the year. The only part of the energy index which was up for the year was for electricity; it rose by 3.4% over the last twelve months.

The Consumer Price Index changes for all items less food and energy jumped slightly in November, to 0.3% versus 0.2% in October.

As has been typical in the past, the shelter index had the most influence on that, with a net 0.4% increase after already having risen 0.3% the previous month. House and apartment rentals, which are a key part of this index, were up 0.5%. The owners’ equivalent rent category increased by the same amount.

Medical care costs went up by 0.6% overall last month. That is double what the price increases in this area were for October, at 0.3%.  Physicians' services went up 0.6% this time, and the index for prescription drugs rose 0.5 percent. Hospital services rose by considerably smaller 0.1% value for the month.

In other categories:

Used car and truck prices rose by 1.6%. That was the first monthly increase after five previous months of declining prices in this area. Labor strikes at major auto manufacturers impacted the delivery of new vehicles. 

Motor vehicle insurance was up too, by 1.0% this month, a slower rate of increase compared to October’s 1.9% rise.

The price of apparel dropped by 1.3% for November. That represents a substantial reversal from last month’s rise of 0.1%.

Household furnishing and operations’ prices dropped 0.4% for the month.

Communications costs went down by 0.6% in November.

Other areas of the economy which saw prices decline, but by smaller amounts, were in the areas of new vehicle purchases, airline fares, and recreation. The latter two often decline this time of year as the summer vacation period has already passed.

Over the past year, shelter costs led the net increase for all items less food and energy with a 6.5% annualized increase; further, because of the amount of money spent on shelter, this increase was responsible for 70% of the overall net increase in the all items less food and energy category.

The other big increases in the all items less food and energy area in the last twelve months were in motor vehicle insurance, which rose by a whopping 19.2%; personal care at 5.2%; recreation costs, which were up by 2.5%; and new vehicle purchases, with a net 1.3% increase.

The Fed’s Action

Yesterday Federal Reserve Board Chairman Jerome Powell announced he would once again not be raising prime lending rates in the country.

It was the third month in a row of no rate increases.

The announcement came after last week’s hiring report showing the economy added 199,000 jobs in November, mostly in line with previous estimates, as well as the previous week’s report from the Bureau of Labor Statistics that the total number of open positions in the country had declined from 9.3 million in September to just 8.7 million in October.

That, coupled with data showing hourly wages were up by an annualized rate of just 4.0% for the twelve months ending November 30, and the latest Consumer Price Index data averaging out at a 3.1% annualized increase, appears to have pushed the Fed not only to keep prime lending rates steady but also giving at least a hint that there may not be any more upward lending rates adjustments for some time.

It is mostly everything the Federal Reserve Board was hoping the economy could accomplish, much of which it did despite – rather than because – of the high prime lending rates. In many ways that is even a stronger message that business is in reasonable shape at this time.

Despite that, as Fed Chair Powell announced the decisions from this week’s meeting of the Federal Open Market Committee (FOMC), he still cautioned that even though keeping interest rates stable would be maintained for a while, things could still change in the future.

“People [on the FOMC] generally think that we’re at or near [the final level], and think it’s not likely that we will hike,” Powell said yesterday.

Further, Powell continued, “There’s little basis for thinking that the economy is in a recession now.”

But despite those positive words, the Fed chair added his standard warning that things could change. So while interest rate increases were not very likely soon, he said the members of the Fed board are not taking “the possibility [of raising rates” off the table.

At this point, despite how Powell phrased that, the truth is wages are growing relatively slowly, inflation is down remarkably from its 9.1% peak in June 2022, job growth is stable and rising, and the job market has declined enough so there is less pressure from that end to cause wages to increase more than they are now.

Money managers and economists are now watching for signs the Fed might issue its first interest rate cut since the rapid rises began in March 2022. A consensus of forecasters is that could happen as early as the second calendar quarter of 2024.