US Experiences First Monthly Price Drop Since April 2020, Indicating Slowing Inflation
For the first time since April 2020, the United States has experienced a monthly drop in prices, signaling a potential shift in the country's inflationary trend. According to a report released Friday by the Commerce Department, prices fell in November, breaking a three-year pattern of consistent and sometimes steep monthly increases.
The Personal Consumption Expenditures (PCE) price index, which is a broad measure of the prices US households pay for goods and services, declined by 0.1% from October. This drop brings the annual inflation rate down to 2.6%, a notable decrease from the 40-year high of 7.1% reached in June 2022.
A significant factor contributing to this decline was a decrease in energy prices, with the report citing a 2.7% drop from October. This reduction in gas prices played a pivotal role in driving the overall price index into negative territory for the month.
Economists view this trend as a positive sign, indicating that the Federal Reserve's aggressive interest rate hikes might be achieving the desired effect of cooling inflation without pushing the economy into a recession. Matt Colyar, an economist at Moody's Analytics, described the trend as “graceful and encouraging” and noted that it aligns with the Fed's goal of bringing prices closer to their 2% target.
The core PCE price index, which excludes volatile food and energy prices, also showed signs of cooling. The annual increase for November stood at 3.2%, down from 3.4% in October and moving closer to the Federal Reserve's 2% target rate. This is the lowest annual rate for the core index since March 2021.
Joe Brusuelas, chief economist at RSM US, highlighted that the six-month annualized average rate of inflation is now at 1.87%, suggesting easing inflation pressures compared to the 4% pace during the first half of the year. These data are consistent with a strong and growing economy supported by income gains above inflation and a dynamic labor market.
Despite the relief that this trend brings, economists caution against interpreting a single month's decline as indicative of a deflationary economy. Monthly data is often preliminary and subject to revisions. Moreover, the overall index is sensitive to changes in components like food and energy, which can fluctuate significantly.
Gus Faucher, chief economist of PNC Financial Services Group, pointed out that a recession would be needed to see overall deflation in the economy, given the solid state of the labor market and consistent wage growth. He added that the Federal Reserve would likely cut rates to prevent deflation if inflation slowed significantly below 1%.
The Federal Open Market Committee, in its last meeting, kept rates steady but indicated that rate cuts could be a possibility in 2024.
This development marks a turning point for American consumers who have been grappling with high inflation since early 2021. The recent trend could provide some respite, but the economic landscape remains complex and warrants careful monitoring.