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Prices cooled last month, raising hopes that inflation is easing

A new report out Tuesday showed the smallest increase in annual inflation since December 2021

Shoppers in San Francisco last month. November data were released Tuesday by the Bureau of Labor Statistics. (David Paul Morris/Bloomberg News)
7 min

After more than a year of dashed hopes, inflation is finally showing signs of letting up — which may soon bring more relief for households and businesses being squeezed by high prices and the Federal Reserve’s ongoing fight to slow the economy.

Prices cooled again in November, rising 7.1 percent compared with last year, the smallest year-over-year increase since last December. They also climbed 0.1 percent over October, beating analysts’ expectations. And a measure known as “core inflation,” which strips out volatile categories like food and energy, rose 0.2 percent — the smallest increase since August 2021, according to data released Tuesday morning by the Bureau of Labor Statistics.

The idea that 7.1 percent annual price increases are good news may seem counterintuitive, since inflation still hovers near the highest levels in decades. But the new report bolstered hopes — for top economic policymakers and American families alike — that underlying measures are moving in the right direction, and that a better-than-expected report from October was not a one-off. After a year that saw Fed officials scrambling to keep up with inflation, they will now enter 2023 with a belated dose of optimism. That will not be enough to end the central bank’s campaign of interest rate hikes, but it will certainly be enough to stick with plans to slow down, and it could portend a policy shift next year, so long as progress keeps up.

“The movement is welcome news,” said Diane Swonk, chief economist at KPMG. “[Fed officials] need a trend, and that’s where they’re stuck. They can’t call it a trend yet. … The supply chain disruptions, all the stuff we thought was boosting inflation, is now unwinding. And that’s good news. But they can’t say the ‘labor market is no longer a problem.’”

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Markets soared on the news, since it gave Wall Street new assurance that the Fed was starting to see the progress needed to slow down on rate hikes. Stocks mellowed somewhat after roaring at the open, but the Dow Jones industrial average closed the day up 0.3 percent. The S&P 500 index climbed 0.7 percent, and the Nasdaq 1 percent.

The new report found that the cost of housing — specifically, rent — was by far the largest contributor to inflation last month, offsetting decreases in gas, electricity and other energy prices. Rent rose 0.8 percent over October, up slightly from the month before, and it remains a major sticking point even though the broader housing market is already cooling down. Economists and Fed officials are fixated on rent, since that makes up a major share of the consumer price index and must come down to get overall inflation back to normal levels.

But the report was mostly sprinkled with encouraging news. Costs were down 2.9 percent for used cars and trucks, the fifth consecutive drop for that category. Prices for new cars were flat. Airfares were down 3 percent over the month after falling 1.1 percent in October. Health-related costs, like hospital services and prescription drugs also fell. Much of the progress was also tied to falling goods prices, thanks in part to stronger supply chains.

Food costs, a major burden on families nationwide, were up 0.5 percent, but that was the slowest rate of increase in months.

Post reporters Damian Paletta and Rachel Siegel explain how economic downturns begin. (Video: Hope Davison, Drea Cornejo/The Washington Post, Photo: Michael S. Williamson/The Washington Post)

President Biden said the report was “good news for the holiday season” as prices for everyday items like televisions and toys fell. He said he hoped prices would be back to normal levels “by the end of next year,” and made clear that any sort of victory lap would be premature.

I want to be clear. It’s going to take time to get inflation back to normal levels as we make the transition to a more stable and steady growth,” he said.

The latest inflation data comes as the Fed convenes for its final meeting of the year. Officials are widely expected to raise interest rates by a half-percentage point on Wednesday, a slightly slower pace than they have been on since the summer, and Fed Chair Jerome H. Powell will take questions on the inflation outlook going into 2023. They will also release a fresh set of internal projections showing how much further rates could climb and how long borrowing costs may stay high. The central bank’s baseline rate is expected to eclipse 5 percent before the Fed pauses hikes sometime next year. It sat near zero for much of the pandemic.

The November inflation report is not expected to change the Fed’s imminent plans. But it offers greater clarity on what is happening with inflation, and whether there are steady signs that the Fed’s policies are taking hold in broad swaths of the economy.

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Still, the trend needs to stick before officials can even consider celebrating. And there is plenty more work to do. The Fed’s rate hikes have significantly slowed the housing market as mortgage costs soar. But many economists do not expect to see results in rent costs — which make up a large chunk of the consumer price index — until well into 2023. The tight labor market is also putting pressure on wages, which officials fear will become a driver of inflation if prices continue to climb out of control.

“We should not expect Powell to flag any kind of pivot this week,” Evercore ISI’s Krishna Guha wrote in an analyst note. “The message will still be some more work to do raising rates in order to cool the labor market, wages and non-housing services; the cumulative data through [the beginning of next year] will decide how much.”

In the meantime, the Fed is charging ahead and warns that even once it stops hiking rates, borrowing costs will stay high for some time. Speaking at the Brookings Institution last month, Powell said there were some signs that inflation was easing in the costs of goods and housing and that supply chains should continue clearing. But the tight labor market remains a problem for controlling prices because businesses have to pay more in wages, and officials are wary of easing up prematurely only to let inflation return and fester later on.

“It is likely that restoring price stability will require holding policy at a restrictive level for some time,” Powell said at Brookings. “History cautions strongly against prematurely loosening policy. We will stay the course until the job is done.”

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Indeed, people appear more optimistic that inflation is on the right path. Survey data released Monday by the New York Fed showed inflation expectations went down in November in the short, medium and longer terms. Respondents were also more optimistic about the labor market, which has yet to be swarmed by widespread layoffs, over the coming year.

But 2022 made clear that predictions remain a poor match for the coronavirus economy, and 2023 could be no different.

Cleveland Express Trucking was pinched from many sides this year, from the industry’s driver shortages to soaring energy costs over the summer. More recently, falling diesel costs have helped the bottom line, company president John Lamb said. Hiring has also improved for many carriers.

But, Lamb said, he normally relies on a pickup in business around the holiday season, and that boost is not materializing yet. To Lamb, that suggests the Fed’s massive effort to slow the economy is working. What that means for the future remains to be seen.

“Most trucking companies get a little bump in the fourth quarter with the holidays. The bump never came,” Lamb said. “I think the industrial economy is slowing down. … [Now] it’s just kind of a ‘wait and see’ attitude. But things are slower than we’d like them to be.”