Inflation cooled in November on an annual basis, bolstering investor hopes that the Federal Reserve will hold interest rates steady at its policy meeting this week.
But price increases did tick up on a monthly basis, adding to the debate over when the central bank will start to lower rates as inflation eases back toward its 2% target.
According to the latest data from the Bureau of Labor Statistics, prices rose 3.1% over the prior year in November, a slight deceleration from October's 3.2% annual gain. Prices ticked up slightly at 0.1% over last month.
Economists had expected the Consumer Price Index (CPI) to come in flat month over month and rise 3.2% year over year, according to data from Bloomberg.
As expected, lower energy costs held the headline figures to a smaller gain, with energy prices dropping 2.3% month over month and 5.4% on an annual basis. This was dragged down by falling gas prices, which declined 6.0% from October to November and 8.9% on an unadjusted annual basis.
On a "core" basis, which strips out the more volatile costs of food and gas, prices in November climbed 4.0% over last year — matching the annual increase seen in October, according to Bloomberg data. This was the first time since March that the annual core inflation rate did not decline.
Monthly core prices climbed 0.3%, slightly higher than October's 0.2% monthly rise. Economists had expected core prices to come in at those levels.
Stocks initially ticked lower in early trading but moved higher by mid-morning as investors digested the report.
"Another sharp drop in gasoline prices last month kept headline CPI inflation on a downward trend but core inflationary pressures remain more stubborn, with core inflation unchanged at 4%," wrote Michael Pearce, lead US economist at Oxford Economics. "With underlying inflation set to trend lower only gradually next year, we expect Fed officials to push back hard on market expectations that rate cuts could come as soon as spring."
Other notable call-outs from the inflation print include the shelter index, which rose 6.5% on an unadjusted annual basis to account for nearly 70% of the total increase in core inflation.
On a monthly basis, the index increased 0.4%, a slight uptick from October’s 0.3% monthly jump.
Within core inflation, rent prices remained elevated. The index for rent and owners' equivalent rent each rose 0.5% on a monthly basis. Owners' equivalent rent is the hypothetical rent a homeowner would pay for the same home.
Other indexes that rose in November included medical care and motor vehicle insurance, which increased 1.0% after rising 1.9% the prior month.
The monthly prices for used cars, which have ticked down in recent months, rose 1.8% after dropping 0.8% in October and 2.5% in September.
The food index increased 2.9% in November over the last year, with food prices rising 0.2% from October to November. The index for food at home increased 0.1% over the month after rising 0.3% in October.
Egg prices increased a sizable 2.2% month over month after rising just 0.1% in October. Prices had risen 0.9% in September after falling 2.5% in August and 2.2% in July.
The indexes for apparel, household furnishings and operations, communication, and recreation were among those that decreased over the month, according to the BLS.
To hike or not to hike?
Although inflation has remained significantly above the Federal Reserve's 2% target, investors are largely betting the Federal Reserve won't raise rates in December — especially after recent dovish rhetoric from Federal Reserve officials.
Fed governor Christopher Waller said late last month he's "increasingly confident" interest rates are at the right level to fend off inflation.
Following the release of the inflation data, markets were pricing in a nearly 100% chance the Federal Reserve keeps rates unchanged on Wednesday, according to data from the CME Group.
The market expects the central bank to begin cutting rates at its March meeting, pricing in a roughly 40% chance of a rate cut. Still, economists aren't completely convinced a rate hike will come at that time.
"Overall, this will do little to change the Fed's recent communications that core inflation remains too strong to contemplate shifting to rate cuts any time soon," Pearce said. "Market expectations of rate cuts early next year are likely to be disappointed. We see more stubborn wage and core inflation pressures keeping the Fed on prolonged hold, with cuts likely to be delayed until September."
Read more about the latest inflation data: