Seeking Alpha

U.S. Inflation Rose 0.3% In November, Higher Than Expected

Includes: TIP
by: Tipswatch
Bonds, long-term horizon, I Bonds, TIPS

Headline inflation, which was higher than expected in November, has now topped 2.0% for the first time since November 2018.

Core inflation matched expectations but remained moderately high at 2.3% year-over-year.

Non-seasonally adjusted inflation declined 0.05%, meaning principal balances for all TIPS will decline slightly in January.

The Consumer Price Index for All Urban Consumers rose 0.3% in November on a seasonally adjusted basis, after rising 0.4% in October, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, "headline" inflation increased 2.1%.

Inflation versus consensus

This was the second month in a row that the all-items index surpassed the consensus estimate. Inflation in October came in at 0.4%, higher than the estimate of 0.3%. November's 0.3% surpassed the consensus estimate of 0.2%, and the year-over-year number of 2.1% also topped the estimate of 2.0%.

However, the numbers for core inflation, which strips out food and energy, matched the consensus numbers of 0.2% for November and 2.3% year-over-year.

As is often the case, a main factor in November's all-items increase was a 1.1% increase in the price of gasoline, which is still down slightly (1.2%) year over year. But other prices also showed marked increases:

  • The cost of shelter was up 0.3% in November and up 3.3% year over year.
  • The costs of medical care services rose 0.4% in November, following a 0.9% increase in October, and now are up 5.1% year over year.
  • Food prices rose only 0.1% and are up 2.0% over the last year.

A separate Labor Department report released Wednesday showed U.S. inflation-adjusted wages were unchanged in November, as consumer prices outpaced average hourly earnings, the Wall Street Journal reported.

My takeaway: Inflation continues to run at a moderate level, a bit higher than expected. When you read articles stating that "inflation is dead," stop and think: Annual inflation of 2.1% is real, alive and worth noticing.

Here is the 12-month trend for headline and core inflation, showing the stable trend of core inflation at or above 2.0%, and headline inflation now rising to to that level:

Core vs. headline inflationWhat this means for TIPS and I Bonds

Investors in Treasury Inflation-Protected Securities and U.S. Series I Savings Bonds are also interested in non-seasonally adjusted inflation, which is used to adjust principal balances of TIPS and set future interest rates for I Bonds. For November, the BLS set the inflation index at 257.208, down 0.05% from the October number. (Differences in seasonal versus non-seasonal inflation will balance out over 12 months.)

For TIPS. The November inflation report means that principal balances for all TIPS will be adjusted downward 0.05% in January, after rising 0.23% in December. Here are the new January Inflation Indexes for all TIPS.

For I Bonds. November's inflation report was the second in a six-month string that will determine the I Bond's inflation-adjusted variable rate, which will be reset on May 1 based on non-seasonally adjusted inflation from September 2019 to March 2020. At this point, inflation has increased 0.17% during this period, with four months to go. That translates into a variable rate of 0.34%, which is meaningless this early in the cycle. The current variable rate for I Bonds purchased before May 1 is 2.02%, annualized. Here are the numbers:

Inflation and I BondsWhat this means for future interest rates

The Federal Reserve's Open Market Committee is meeting today and will announce a decision on short-term interest rates this afternoon. The expectation is that the Fed will hold its federal funds rate at the current level of 1.50% to 1.75%, and today's inflation report reinforces that expectation.

The U.S. economy is healthy, the stock market is at near-record highs, and inflation is in a solidly moderate range. This is not the time for further cuts in interest rates. I'd expect the federal funds rate to hold steady well into 2020.

For investors, the November inflation report is another reminder that inflation exists (at a moderate level) and should be recognized in an overall investment strategy. But the market doesn't seem to care, after years of very low inflation.

I'll leave you with this piece of advice, posted this morning by inflation-watcher Michael Ashton:

... There's no real reason to think that the Fed cares ... so from a markets perspective, TODAY and this month, these numbers don't mean much. Except for you, because the Fed isn't going to try and restrain inflation so you better make sure you're prepared.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. The investments he recommends can purchased through the Treasury or other providers without fees, commissions or carrying charges.