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Closely Watched CPI Report Shows Softer Inflation, Stocks Jump On Signs Inflation Is Rolling Over

Closely Watched CPI Report Shows Softer Inflation, Stocks Jump On Signs Inflation Is Rolling Over

inflation rolling over

Christopher "Mad Dog" Thomas carries his son, Rian Gatewood-Hillestad, while shopping at Pete's Market in Chicago's Garfield neighborhood, Aug. 15, 2019. (AP /Amr Alfiky)

Rising less than expected in November, consumer prices are credited with helping stock prices jump higher as investors look for signs that runaway inflation is softening or rolling over.

The core consumer price index rose 0.2 percent in November, the Labor Department reported on Dec. 13. The core CPI rose 6 percent on an annual basis, compared with a 6.1 percent estimate. Economists surveyed by Dow Jones had been expecting a 0.3 percent monthly increase and a 7.3 percent 12-month rate.

The increase from a year ago is still way higher than the Federal Reserve’s 2 percent target for a healthy inflation level, but it was tied for the lowest since November 2021.

Falling energy prices, down 1.6 percent for the month, helped keep inflation lower with a 2 percent decrease in the price of gasoline. But despite the monthly decline, the energy index for November 2022 was 13.1 percent higher than in November 2021.

Food prices in November 2022 rose 0.5 percent and are up 10.6 percent from a year ago.

The cost of housing, which makes up about a third of CPI weighting, continued to rise, up 0.6 percent for the month and up 7.1 percent for the year.

And yet CNBC reported that the slower-than-expected November CPI increases are the latest signs that runaway inflation dogging the economy is starting to loosen up.


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News of the CPI report initially sent stocks soaring with futures tied to the Dow Jones Industrial Average up more than 800 points before prices sank lower. Then the Dow settled at about 275 points up in the first hour of trading.

“Cooling inflation will boost the markets and take pressure off the Fed for raising rates, but most importantly this spells real relief starting for Americans whose finances have been punished by higher prices,” said Robert Frick, corporate economist with Navy Federal Credit Union. “This is especially true for lower-income Americans who are disproportionately hurt by inflation.”

Real average hourly earnings rose 0.5 percent for November, but they were still down 1.9 percent from a year ago.

So is inflation poised to roll over?

It’s reasonable to expect a year-over-year core CPI print of 3 percent to 3.5 percent by this time next year, chartered financial analyst Sean Kaukas wrote in Dec. 9 column for Natixis Advisors.

“With several survey-based measures showing inflation expectations for next year in the 4 perent to 5 percent range, we think this could be a major upside catalyst for risk assets,” he added.

Kaukus identified three components worth watching to signal that inflation normalization is underway: transportation, shelter and health insurance costs.

Used vehicles are getting cheaper as auto supply chains show improvement, Kaukus wrote.

Shelter inflation is set to slow following rent increases in 2021, which went up almost 18 percent, according to Apartment List rent estimates. Because rental lease agreements are usually signed a year in advance, the 2022 CPI largely reflected off-the-charts 2021 shelter costs. “We think it’s reasonable to expect significant disinflation in housing costs over the next year,” Kaukus wrote.

Here’s what Kaukus said about health insurance cost deflation expected in the coming year:

“In 2021, we saw a massive increase in health insurance utilization as the pandemic faded, and thus, a decline in retained earnings for insurers. This decline translated to a large increase in the health insurance index for most of 2022. But starting with the October CPI print that was just released, an increase in health insurer retained earnings has caused the health insurance index to flip back into deflationary territory. Given the CPI methodology, this deflation should persist for the next year. Putting some actual numbers around it, this line item is set to flip from a 28% increase in health insurance costs over the past year to a 39% decline over the next year. At just a 1% weight within the core CPI basket, this represents nearly a 0.70% decline in year-over-year core CPI inflation.”

Other key CPI line items also have the potential to roll over inflation due to the impact of changing economic conditions, according to Kaukus. These include:

Household furnishings and supplies (5% weight in core CPI) – Falling shipping costs, excess inventory, and post-Covid demand slowdown
Apparel (3% core CPI weight) – Deflationary pressures similar to household furnishings and supplies
New vehicles (5% core CPI weight) – Semiconductor availability improving, car manufacturer inventory builds, wholesale car prices plummeting, and rising financing costs
Airfare (0.9% core CPI weight) – Revenge spending on travel can’t last forever, oil prices cooling off, and pilot shortage slowly improving are all deflationary forces
Motor vehicle insurance (3% core CPI weight) – Expect leveling off, given high correlation with vehicle miles traveled, which have recovered to pre-pandemic highs.”