The Bureau of Labor Statistics reported on Tuesday that the consumer price index rose 7.1% from a year ago in November, falling below economists' expectations of an 7.3% increase, according to financial data firm FactSet Research Systems.
Excluding the volatile food and energy sectors, the core CPI rose by an annualized 6% in November.
The overall 7.1% CPI figure for November was the smallest 12-month increase since December 2021, the BLS noted, and fell below the 7.7% annualized increase reported in October.
The annualized CPI figure has been coming down steadily since June, when it was at 9.1%, a 40-year high.
The Federal Reserve, which has been committed to taming inflation, will release its final policy rate decision for the year on Wednesday and will likely look closely at the November CPI data. The central bank has raised the benchmark federal funds rate by 75 basis points at each of its last four consecutive meetings. The fed funds rate is now at a target range of 3.75%-4%, the highest level since January 2008.
However, the pace of any rate hikes is likely to slow down in the coming months. At a speech delivered to the Brookings Institution in Washington, D.C., on Nov. 30, Fed Chairman Jerome Powell said that while rates need to keep rising to help bring down inflation to its 2% target level, he added: "Monetary policy affects the economy and inflation with uncertain lags, and the full effects of our rapid tightening so far are yet to be felt. Thus, it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down."
According to the CME Group's FedWatch tool, as of 8:40 a.m. EST Tuesday, market participants' pricing of Fed Fund futures indicated there is an 81.8% probability that the Fed will increase rates by another 50 basis points at its Wednesday meeting, and only an 18.2% probability that the Fed will increase rates by 75 basis points.
Nancy Davis, founder of Quadratic Capital Management and portfolio manager of the Quadratic Interest Rate Volatility and Inflation Hedge Exchange-Traded Fund, based in Greenwich, Conn., said by email that while Tuesday's CPI report showed a deceleration in inflation, inflation is "still very elevated and is over three times greater than the Fed's 2% target, so this isn't time for the Fed to take a victory lap."
"While it is certainly possible that we have now passed peak inflation, if we keep up this pace of decline, price increases will continue at levels that are still very painful for consumers," she noted.
Tuesday's inflation data won't likely change anything for the Fed ahead of its meeting this week, she noted. "[Fed chief] Powell wants to show the market that the days of the big, 75 basis point hikes are over, and the pace is slowing, so it's likely that the Fed announces a smaller 50 basis point rate hike on Wednesday," Ms. Davis added.
Quadratic has about $1.1 billion in assets under management.
Cheryl Smith, Boston-based portfolio manager at Trillium Asset Management, also thinks the mild CPI reading will lead the Fed to raise rates by 50 basis points on Wednesday.
"Both stock and bond markets are reacting ecstatically, (but) the reaction seems overdone," she said by email. "Four months (of falling inflation numbers) is a very short time frame for the Fed to draw the conclusion that the inflation problem is over. In addition, the substantial amount of monetary tightening already in place raises the risks of recession."
Trillium had about $5.4 billion in assets under management.
John Luke Tyner, Fairhope-Ala.-based portfolio manager and fixed income analyst at Aptus Capital Advisors, said he is expecting the Fed to hike by 50 basis points on Wednesday and probably boost rates by 25 basis points in February 2023.
"A peak (interest) rate in either February or March is becoming more likely," he added by email. "Better visibility on the peak rate is good for risky assets but doesn't change the view that the yield curve should maintain its inversion if not invert further. We assume it will take more proof that inflation is indeed coming down quickly and the more likely scenario is that the Fed will stay at peak for the remainder of 2023, unless the economy weakens a lot."
Aptus has $3.9 billion in AUM.
