Economics
Annual inflation rate accelerates to 2.7% in November, as expected
Consumer prices rose at a faster annual pace in November, a reminder that inflation remains an issue both for households and policymakers.
The consumer price index showed a 12-month inflation rate of 2.7% after increasing 0.3% on the month, the Bureau of Labor Statistics reported Wednesday. The annual rate was 0.1 percentage point higher than October.
Excluding food and energy costs, the core CPI was at 3.3% on an annual basis and 0.3% monthly. The 12-month core reading was unchanged from a month ago.
All of the numbers were in line with the Dow Jones consensus estimates.
The readings come with Federal Reserve officials mulling over what to do at their policy meeting next week. Markets strongly expect the Fed to lower its benchmark short-term borrowing rate by a quarter percentage point when the meeting wraps up Dec. 18, but then skip January as they measure the impact successive cuts have had on the economy.
The report further solidified the market outlook for a cut, with traders raising the odds to 99%, according to the CME Group’s FedWatch measure. Odds of a January reduction also edged higher, hitting about 23%.
“In-line core inflation clears the way for a rate cut at next week’s [Federal Open Market Committee] meeting,” said Whitney Watson, global co-head and co-CIO for fixed income at Goldman Sachs Asset Management. “Following today’s data the Fed will depart for the holiday break still confident in the disinflation process and we think it remains on course for further gradual easing in the new year.”
While inflation is well off the 40-year high it saw in mid-2022, it remains above the Fed’s 2% annual target. Some policymakers in recent days have expressed frustration with inflation’s resilience and have indicated that the pace of rate cuts may need to slow if more progress isn’t made.
If the Fed follows through with a reduction next week, it will have taken a full percentage point off the federal funds rate since September.
Much of the November increase in the CPI came from shelter costs, which rose 0.3% and have been one of the most stubborn components of inflation. Fed officials and many economists expect housing-related inflation to ease as new rental leases are negotiated, but the item has continued to increase each month.
A measure within the shelter component that asks homeowners what they could get in rent for their properties increased 0.2%, as did the actual rent index. They are the smallest monthly respective increases since April and July 2021.
The BLS estimated that the shelter item, which has about a one-third weighting in the CPI calculation, accounted for about 40% of the total increase in November. The shelter index rose 4.7% on a 12-month basis in November.
Used vehicle prices rose 2% monthly while new vehicle prices increased 0.6%, reversing the recent trend that has seen those items come down.
Elsewhere, food costs rose 0.4% monthly and 2.4% year over year, while the energy index increased 0.2% but was down 3.2% annually. Within food, the measure of cereals and bakery products fell 1.1% in November, the single biggest monthly decline in the measure’s history going back to 1989, according to the BLS.
The increase in the CPI meant that average hourly earnings for workers were basically flat for the month when adjusted for inflation, but increased 1.3% from a year ago, the BLS said in a separate release.
The march higher in U.K. government bond yields since the launch of the Labour government’s debut budget plan in October sparked widespread concern last week, as borrowing costs rose to breach numerous decade highs.
The prospect of public spending cuts or further tax rises came into focus as 30-year gilt yields hit their highest level since 1998. Despite initially falling after Labour’s election victory in July, 2-year gilt yields have also climbed back above 4.5%, while the 10-year yield reached levels not seen since 2008.
Waning investor confidence in the U.K. was particularly highlighted by a concurrent fall in sterling, which on Friday hit its lowest level against the U.S. dollar since November 2023.
Borrowing costs are also rising in the euro area and the U.S., and economists point out that and the U.K. is being weighed on by external factors including the return of Donald Trump to the White House and expectations for broadly higher interest rates than previously expected this year.
But the surge in U.K. yields are nonetheless a major headache for the U.K. government, which has pledged to reboot economic growth while ensuring debt declines as a share of the economy within five years. U.K. public sector net debt currently stands at nearly 100% of GDP.
“The rise in gilt yields has a self-reinforcing feedback loop through the U.K.’s debt sustainability, by increasing borrowing costs used for budgeting purposes,” ING Senior European Rates Strategist Michiel Tukker said in a Friday note.
Tukker cited analysis by the independent Office of Budget Responsibility which indicates that the recent rise in yields — if sustained — would wipe out the government’s estimated headroom of £9.9 billion ($12.1 billion) for meeting its self-declared fiscal rules. As well as a goal of moving toward a decline in the U.K.’s debt to GDP ratio on a longer timeframe, those rules commit Labour to covering day-to-day government spending with revenues.
The Institute for Fiscal Studies think tank said Friday there is a “knife edge,” chance of the U.K. achieving the latter fiscal rule, but that Finance Minister Rachel Reeves could “get lucky.”
She otherwise faces an “unenviable set of options,” said IFS Associate Director Ben Zaranko, including bringing forward upcoming changes to how debt is calculated to free up more headroom; paring back current spending plans; announcing more tax rises, which could be conditional on changes within the coming years; or doing nothing and breaking her rule.
Economists Ruth Gregory and Hubert de Barochez at research group Capital Economics also said U.K. gilts may be trapped in a “vicious circle,” in which “the rise in U.K. yields puts a strain on public finances, therefore calling for an even bigger tightening of fiscal policy, but in turn putting additional strain on the economy.”
Pound vs dollar.
Bank of America Global Research strategists said Friday that it was unlikely Labour would breach its rules, and would instead announce further fiscal consolidation — measures to reduce public debt, generally public spending cuts or tax hikes — in the spring or earlier.
That would potentially be through spending cuts, they added, coming off the back of the £40 billion in tax hikes that Labour announced in October.
CNBC has contacted the Treasury for comment.
UK in ‘slow growth trap’ — but not a mini-budget crisis
Former U.K. Finance Minister Vince Cable told CNBC on Friday that higher bond yields were being seen in many countries and were not an “emergency panic situation” — but that markets had realized Britain was stuck in a “slow growth trap.”
“We’ve been there for many years, since the Financial Crisis, then Brexit, then a problem with Covid and Ukraine war, and we’re stuck with relatively high inflation, very slow growth, and so the markets are marking the U.K. down, relatively speaking. But this is not a panic situation, it’s not a crisis of the old-style balance of payment sell off situation,” Cable said.
Labour should have gone for a broader range of tax rises rather than focusing on a hike in National Insurance which has been slammed by the U.K. business community, Cable said. However, he added that the market has broader concerns over U.K. growth and the global economic picture, which is clouded by external factors such as the weaker Chinese outlook.
Cable also downplayed comparisons with the U.K. mini-budget crisis in 2022, when then-Prime Minister Liz Truss’s announcement of sweeping tax cuts triggered massive volatility in the bond market.
“The Truss moment was a prime minister just taking a reckless leap into the dark with a big increase in the budget deficit on the assumption this will somehow trigger economic growth. Well, that clearly isn’t what’s happened this time. The argument is about whether they’ve done enough tightening and whether they’ve done it in the right way, but it’s a different kind of problem,” Cable told CNBC.
That sentiment was broadly reflected in wider analysis. Bank of America strategists called comparisons with the mini-budget “overblown,” noting that the bar for the Bank of England to intervene in the gilt market, as it did at the time, was high.
Capital Economics said last week’s higher gilt yields were an economic headwind but not a crisis, with smaller and slower moves than after the mini-budget; while David Brooks, head of policy at consultancy Broadstone, said there did not appear to be any “systemic issues at play” in the liability-driven investment (LDI) funds which were the biggest concern back in 2022.
Early Life and Professional Foundation
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