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"CPI Cooling Off: The Fed's Dilemma and Prolonged Rate Hike"

"CPI Cooling Off: The Fed's Dilemma and Prolonged Rate Hike"

November 14, 2023

The latest Consumer Price Index for All Urban Consumers (CPI-U) revealed a stagnant October, with a seasonally adjusted zero percent change following a 0.4 percent increase in September. While the 12-month all items index rose by 3.2 percent before seasonal adjustment, a closer look at specific components presents a mixed picture, prompting speculation about the Federal Reserve's future policy decisions.

The energy sector experienced a notable decline, with the energy index falling 2.5 percent in October. A 5.0-percent drop in the gasoline index, alongside decreases in other energy components, contributed to this decrease. This could be interpreted as a positive sign, indicating potential relief on the inflation front.

However, the persistently rising index for shelter, which offset the decline in the gasoline index, raises concerns. Shelter, accounting for a significant portion of the all items index, increased by 0.4 percent in October and 6.7 percent over the last 12 months. This surge, coupled with increases in rent and owners' equivalent rent, has been a primary driver behind the 4.0 percent rise in the all items less food and energy index over the past year.

The Federal Reserve faces a dilemma: the overall CPI may have cooled off, but certain components, particularly shelter, continue to exert upward pressure on prices. The recent moderation in the all items index to 3.2 percent for the 12 months ending October, down from 3.7 percent in September, might suggest a slowing inflationary trend. However, the core index, excluding food and energy, remains elevated at 4.0 percent over the same period.

Our position is the Fed may be inclined to pause its rate-hiking cycle, given the stability in the overall CPI. Yet, the persistence of inflation in key sectors, especially shelter, could lead the Fed to maintain higher interest rates for a longer duration. The upcoming release of the November CPI figures will be crucial in determining the trajectory of the Federal Reserve's monetary policy.

As we await the November 2023 CPI data, economists and investors alike will closely analyze the numbers, seeking clues about the balance between inflationary pressures and the potential need for continued monetary tightening. The delicate dance between economic indicators will shape the Fed's decisions and influence the direction of interest rates in the months to come.

Bureau Of Labor Statistics