The Consumer Price Index (CPI) was unchanged in November, while the index increased 3.4% over the past 12 months. The core index rose 0.2% in November, nudging the year-over-year increase fractionally higher to 2.2%.
Energy prices fell, offsetting increases in other prices, while food prices increased by just 0.1% for the second consecutive month, both of which were positive developments that have been a welcomed by consumers.
The pace of inflation has clearly moderated in recent months, and is expected to continue to ease in the months ahead.
Falling year-over-year inflation is more good news for the consumer. Should inflation continue to moderate, households should feel better about their ability to spend a bit more freely.
If there is any cause for caution, core prices edged higher, although they are not at a troubling level. Given massive debt levels, below-trend economic growth, and high unemployment, we believe the Fed’s tolerance for inflation is likely higher today than may have once been the case. It will be critical for inflation expectations to remain anchored, however, for the Fed to maintain its accommodative stance. At this point, that does not appear to be at risk.
Dissipating inflation pressures should also allow the Fed more room to provide additional stimulus if the economy were to slow in early in 2012. While recent economic data suggests solid fourth quarter results, there is certainly a risk that the sharp slowdown in Europe could be a drag on the U.S. economy as well in the quarters ahead.
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