Truflation US Data Insights: December 2022

The data coming out of the US signaled a further slowdown in inflation in November, as measured by the Consumer Price Index (CPI), led by falling oil and housing prices as pricing continues to unwind from pre-2020 levels.

Economic rhetoric is now turning to the risks of a recession, with major US banks warning that the economic downturn will soon begin affecting consumer confidence. With this in mind, let’s dive deeper into the data to gauge the outlook for inflation in the US.

The Truflation US CPI has continued to drop throughout November as price pressures eased further. The Truflation US index has fallen to 6% as of December 8, down from 6.5% as of November 30 and 7.4% at the end of October.

Some of the categories contributing to this decline are:

• Transport: Driven by a 30% drop in oil prices over the past six months, the rate of price rises in this category has declined by 3% compared to the previous month and 7.8% versus a quarter ago. In particular, we are seeing a marked decline in the prices of used cars, new cars and petrol.
  

• The Food & Non-alcoholic Beverages category has also seen a substantial decline compared to the previous month, dropping by 2.5% to 7.6%, as of December 8. This will be a welcome boon for US households in the run-up to Christmas and is driven by the easing of supply chain bottlenecks and the declining cost of transportation.
  

• The Housing category has held steady in November but is down 2.4% versus the previous quarter. The biggest contributor to this is the drop in rental prices across the US, which are a likely indicator of an impending recession. Rental price increases have dropped by another 0.6% in November to 6.5% year-on-year, down from a peak of 15.7% in March 2022. Mortgage rates have also experienced a slight decline, down from a recent high above 7% for a 30-year fixed rate loan to 6.5% as of 1 Dec.
  

Meanwhile, other economic and financial data coming out of the US points to a mixed picture for the coming months.

• The US stock market experienced a strong month in November, with the S&P 500 up 5.4% and the Dow Jones Industrial Average finishing the month 5.7% higher, though the smaller-cap-focused Russell 2000 had a more subdued month, ending November up 2.2%.
• The US labor market remains tight. Non-farm payrolls were up 263,000 last month, beating economists' expectations of a 200,000 increase and suggesting demand for new workers remains strong despite recession fears. However, this marks a decline from October's numbers.
• Wages are also running hot as a result, with average hourly earnings up 5.1% year-on-year in November - a further increase from October's 4.9% rise and well above market forecasts.
• US Personal Consumption Expenditure (PCE) inflation dropped to its lowest level in 10 months, down to 6% in October from 6.3% in September. However, core PCE – a measure that excludes food and energy and is favored by the Federal Reserve – increased from 4.9% in September to 5.1% in October.
• The S&P Global US Manufacturing PMI suffered its sharpest decline since May 2020, down to 47.7 in November from 50.4 in October. This was led by a drop in production in November as a result of weak client demand, while new export orders fell for the sixth month in a row.
• US consumer confidence continued to decline, based on data from the Conference Board. The Consumer Confidence Index is down to 100.2 in November from 102.2 in October, while the indices for consumers' assessment of current business and labor market conditions, as well as their expectations for income, business and labor conditions, have also declined.

Given this mixed picture, the US Federal Reserve can be expected to continue tightening monetary policy for the time being. However, the pace of hikes is set to decrease from 0.75% to 0.5% at the next monetary policy meeting on December 13-14.

This has already been priced in by the market, with gold prices up 1% on Dec. 7, while the US dollar dipped against rival currencies and 10-year US Treasury yields fell to their lowest levels since September at 3.47%.

In terms of our expectations for the US inflation announcement on Tuesday, Truflation is predicting the US Bureau of Labor Statistics (BLS) reported inflation figure will come in at 7.4% for November, 0.3% lower than the previous month's figure of 7.7%.

Oliver Rust, Truflation's Project Lead and Data Expert, said: "Despite an easing of inflationary pressures in the US, we expect the Federal Reserve to continue on its path of monetary tightening for the time being, albeit at a reduced pace. We expect the federal funds rate to be increased to 4.25%-4.50% at the December meeting. We will be closely watching the economic data for signs of recession in the coming months."

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