Disinflation ruled the day in November, as the sharp decline in energy costs pulled the headline Consumer Price Index down by 0.3% to just 1.3% on a year-over-year basis. The decline was the largest single-month drop since December 2008, and easily exceeded the expected result of a decline of just 0.1%.
While the headline result was disinflationary, core CPI increased by 0.1%. The differential illustrates the significant impact of the decline in oil prices. The core index dipped to 1.7% on a year-on-year basis.
A sustained, substantial drop in oil prices is generally considered positive for consumers, providing a boost to cash available for discretionary spending. If sustained, it may also reduce the prices of other goods in which oil is a substantial input. Conversely, if those cost reductions aren’t passed along to consumers, it could provide a boost to the profitability of companies that benefit from the lower cost of petroleum-related inputs.
Beyond falling oil prices, the recent strength of the Dollar has also helped to keep a lid on inflation domestically by reducing the price of imported goods.
To this point, wage growth has been lackluster in the current expansion. However, as labor market conditions have improved, there are signs that wage pressures may also be starting to build – a factor that tends to be a harbinger of stronger, and more entrenched, inflationary pressures.
Outside of the U.S., Global economies remain in a tenuous position. Yesterday’s aggressive interest rate hike in Russia points to an increasingly desperate attempt to defend the ruble and halt the flight of capital out of the country. Meanwhile, Japan and the Eurozone continue to push expansionary policies to battle disinflationary pressures.
All eyes are now on the Fed’s scheduled statement and press conference this afternoon, as investors look for guidance on the central bank’s timetable for raising short-term interest rates. Increasingly healthy labor market conditions coupled with measures of inflation that remain below the Fed’s target are opposing forces that seemingly raise the stakes for policymakers and remains a potential source of volatility for capital markets.