USA: Inflation slowed considerably in November

by Lucia Mutikani

WASHINGTON (Reuters) – Prices in the United States fell in November for the first time in more than three and a half years, allowing inflation to fall below 3% at an annual rate, which reinforces the hopes of financial markets of a reduction in interest rates by the American Federal Reserve from March.

Data released Friday by the U.S. Commerce Department also showed that underlying inflationary pressures continued to ease last month. This slowdown has allowed households to increase their purchasing power, which supports consumer spending and the economy as a whole as the year draws to a close.

“(Fed) Chairman (Jerome) Powell couldn’t have asked for a better gift this year,” said Sal Guatieri, economist at BMO Capital Markets in Toronto.

“For now at least, things are looking better than the Fed or almost anyone could have imagined at the start of the year. While the Fed won’t rush to cut rates, it’s not probably more than a matter of time,” he added.

Inflation, measured by the Personal Consumption Expenditures (PCE) price index, the Fed’s preferred indicator, fell 0.1% last month, the Commerce Department said. This is the first monthly decline in the PCE price index since April 2020 and follows stagnation (0.0%) in October.

Food prices fell slightly, by 0.1%, and energy prices, by 2.7%.

In the 12 months to November, the PCE price index rose 2.6% after rising 2.9% in October. This month was the first since March 2021 where the annual PCE price index is below 3%.

Economists polled by Reuters forecast the PCE price index would remain unchanged and rise 2.8% year-on-year.

Excluding volatile items like food and energy, the PCE price index rose 0.1% in November, the same as in October.

On an annual basis, the core PCE price index increased by 3.2% in November, the smallest increase since April 2021, after an increase of 3.4% in October.

EXPECTED DROP OF 125 POINTS IN RATES IN 2024

The Fed has an inflation target of 2%.

According to the CME group’s FedWatch barometer, financial markets expect a 82.5% probability of a cut of at least 25 basis points in Fed rates in March. They forecast that borrowing costs will be cut by 125 basis points by September 2024.

The yield on ten-year US Treasury bonds fell on Friday by around one basis point, to 3.8894% compared to a peak of more than 5% reached in October.

At foreign exchange, the dollar lost 0.31% against a basket of reference currencies.

On the stock market, around 3:30 p.m. GMT, the Dow Jones advanced by 0.29%, the Standard & Poor’s 500 by 0.49% and the Nasdaq by 0.48%.

The Fed decided last week, as expected, to maintain the fed funds rate target at 5.25%-5.50% for the third time in a row, while its president Jerome Powell indicated that the rate director of the central bank was approaching if not already having reached its peak.

Since March 2022, it has raised its key rates by 525 basis points.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.2% last month. October data was revised to show a spending increase of 0.1% instead of the 0.2% previously reported. Economists forecast a 0.3% increase in spending.

Adjusted for inflation, consumer spending increased by 0.3%. This statistic adds to data this week suggesting that the economy is regaining some strength.

This round of optimistic data has prompted economists to revise upward their estimates for gross domestic product (GDP) growth for the current quarter, estimating that it could reach an annualized rate of 2.7%. The US economy grew at a rate of 4.9% in the third quarter.

(Report Lucia Mutikani, French version Claude Chendjou and Dagmarah Mackos, edited by Blandine Hénault)