Another disinflationary hiccup: The Bureau of Labor Statistics (BLS) announced the Consumer Price Index (CPI) rose 0.3 percent in November and 2.7 percent over the last year. Year-over-year prices grew faster in November than in September (2.4 percent) and October (2.6 percent).
Core CPI growth, which excludes volatile food and energy prices, remained largely unchanged. It rose 0.3 percent in November, the same as in September and October. Year-over-year growth of 3.3 percent has also been steady over the same period.
Most of the increase was driven by shelter prices. “The index for shelter rose 0.3 percent in November, accounting for nearly forty percent of the monthly all items increase,” BLS reported. This is the silver lining. We know that shelter price increases tend to lag price increases for other goods and services.
The overall CPI grew faster than its shelter component from February 2021 until November 2022. CPI shelter growth peaked at 8.2 percent in March 2023 and has been falling ever since. It remains above overall CPI growth, and its rate of decrease has moderated. Shelter is heavily weighted in the CPI (roughly one-third of the index), which explains why shelter price growth matters so much for inflation. Although the CPI is supposed to measure general price increases, it’s currently driven largely by supply and demand in housing and apartment markets.
What does the inflation data imply for monetary policy? The current target range for the fed funds rate is 4.50 to 4.75 percent. Adjusting for inflation yields a real rate range of 1.80 to 2.05 percent. The natural rate of interest, which is the inflation-adjusted rate that monetary policy attempts to track, was probably between 0.77 and 1.26 percent in Q3:2024. The range for market rates exceeds the estimated range for the natural rate, suggesting monetary policy remains tight, albeit not as tight as in previous months.
Monetary data tell a similar story. M2, the most commonly cited measure of the money supply, grew about 3.7 percent over the last year. Broader aggregates, which weight money supply components based on liquidity, grew 2.64 to 2.97 percent over the same period. Remember, money supply growth does not imply loose money. We need to know how fast it’s growing compared to money demand.
Like the natural rate of interest, we can only estimate money demand. A reasonable proxy is population growth plus real GDP growth. The most recent data we have says the US population is growing at approximately 0.5 percent per year and real GDP is growing at about 2.7 percent per year. The sum of the two is 3.2 percent, which is faster than all the growth in the monetary aggregates. Again, this looks like moderately tight money.
The FOMC next meets December 17-18. They should not cut interest rates. We have enough data to see a (hopefully temporary) stall in disinflation. Loosening monetary policy further would be inappropriate. The FOMC should keep the rate target at 4.50 to 4.75 percent, and perhaps even prepare for a rate hike in early 2025 if subsequent data confirms we’ve lost ground on the return to 2 percent inflation.