Slowing US inflation to intensify rates debate

Consumer prices in the world’s biggest economy eased to 7.1 per cent in November from a year earlier, as Fed officials gear up to pass another 50 basis points hike.

US grocery prices continued to rise in November, but overall inflation is easing. Picture: Frederic J Brown/AFP

A sharp fall in US inflation in November, by even more than expected and for the second month in a row, is good news for economies worldwide suffering under ever-high interest rates.

A sign, albeit a tentative one, that inflation might be headed back to earth will encourage central banks from Sydney to Washington to take their foot of the interest rate accelerator.

The annual rate of increase in the US consumer price index dropped sharply from 7.7 per cent in October to 7.1 per cent November, US authorities said on Tuesday (Wednesday AEDT) the lowest level in almost a year, and well down from the 9.1 per cent peak in June.

Prices advanced only 0.1 per cent over the month to November, only a third of what forecasters had been expecting.

Energy prices, which fuelled the initial inflationary spurt, fell 1.6 per cent over the month, including a 2 per cent drop in petrol.

Rents, a large contributor to the CPI, remain a problem advancing 0.6 per cent over the month, while food prices were up 0.5 per cent, 10.6 per cent higher than last November.

There’s still a long way to go.

Stripping out volatile food and energy prices leaves annual ‘core’ inflation at 6 per cent, triple the Federal Reserve’s target level.

US President Joe Biden said getting inflation back to normal levels is “going to take time”. Picture: Brendan Smialowski/AFP

The Fed will almost certainly lift the US benchmark interest rate another 0.5 percentage points, to 4.5 per cent, in its final meeting of this week, capping what will be the most rapid increase in US official interest rates since the early 1980s.

“Mounting disinflation will soon persuade the Fed to move to the sidelines after one additional 25 basis point hike in early February,” said Paul Ashworth, an economist at Capital Economics, reflecting most economists’ view that high inflation would be ‘transitory’ after all – just a lot longer than originally expected!

Central bankers will be quick to claim credit for any improvement in inflation.

But to what extent is the decline their doing?

We’ll never know for sure, but its’ remarkable how little impact higher interest rates have had in the US on the interest rate sensitive sectors of the economy.

The bluntest tool in the economic policy kit to reduce inflation, higher interest rates, hasn’t wrought anywhere near the economic collateral damage on households and businesses we might have expected.

The US shows no sign of entering a recession anytime soon: car sales, new home sales and consumer spending remain strong.

The jobless rate is still at the lowest levels since the 1960s, back to where it was before pandemic restrictions wrought havoc with the US jobs market.

The Biden administration, indeed all governments, are fond of blaming inflation on Russia’s invasion of Ukraine, but the US inflation rate was 7.9 per cent in February, before Vladimir Putin launched his war.

Inflation has been above 5 per cent in the US for 19 months in a row.

Indeed, the price of petrol at the bowser is now a little lower on average in the US than it was a year ago.

Is that thanks to Putin’s war? Hardly. The temptation to ascribe politically convenient explanations to complex phenomena should be resisted.

Blame should start at home.

Governments caused high inflation by shutting down economies through the pandemic, then poured fuel on the fire by creating trillions in new dollars and showering them on households and businesses who struggled to spend them as pandemic restrictions lingered.

The bigger question is whether the unexpected inflationary burst has left everyone permanently poorer.

Big-ticket items remain significantly more expensive than they were before the pandemic: new car prices and food are each 20 per cent higher than in January 2020, for instance. Rents are 12 per cent higher.

Falling inflation only means we’re getting poorer at a less rapid pace, not an especially inspiring outlook.

In aggregate real wages declined 1.2 per cent over the year to November in the US, a headline statistic that gives a misleadingly optimistic picture given a large minority of workers receive no increase at all.

Even if prices stand still for a while, it will take many years for some households to catch up, and that’s assuming governments don’t try to ‘help’ again.

US President Joe Biden said: “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 growth, we could see setbacks along the way as well. We shouldn’t take anything for granted,” he said.