CPI comes in cooler than expected in November, core CPI moderates to 6.0% Y/Y

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November Consumer Price Index: +0.1% vs. +0.3% expected and +0.4% prior. That's the lowest inflation rate in more than a year, indicating that the Federal Reserve's aggressive rate-hiking moves are filtering through the economy to reduce demand.

Y/Y, CPI: +7.1% vs. +7.3% expected and +7.7% prior.

The energy index dropped 1.6% during the month as the gasoline index, the natural gas index, and the electricity index all fell. Meanwhile, the food index increased 0.5% during November.

Core CPI: +0.2% vs. +0.4% expected and +0.3% prior. That's the smallest increase since August 2021.

Y/Y: +6.0% vs. +6.1% expected and +6.3% prior.

The largest contributor to the CPI index was for shelter, which more than offset decreases in the energy index, the U.S. Bureau of labor statistics said. The shelter index rose 0.6% during the month and is 7.1% higher than it was a year ago.

"As I had been expecting, we are finally seeing a more precipitous decline in both headline and core rates of inflation, as both the monthly and annual rates are reported below expectations," said SA contributor Lawrence Fuller. "The declines in transportation services and medical care are encouraging, while shelter costs should follow early next year."

The numbers are exactly what the Federal Reserve wants to see — a moderation in inflation. Still, the 6.0% Y/Y increase in core CPI is far higher than the Fed's 2% inflation target. "This should give the Fed the confidence that it can end its rate-hike cycle tomorrow and allow market forces and the tightening to date to bring inflation down to target next year," Fuller said.

Fuller is in the minority in suggesting that the Fed will stop hiking its rate tomorrow. Traders continue to expect the Fed will raise its key rate by 50 basis points to a 4.25%-4.50% range on Wednesday, according to the CME FedWatch tool.

The futures of the three major U.S. equity indexes jumped after the release. S&P futures +0.9%, Nasdaq +1.1%, and Dow +0.8%. Bonds also gained, pushing the 10-year Treasury yield down 6 basis points to 3.50%.

Schwab Chief Investment Strategist LizAnn Sonders pointed out that the three-month percentage change in the CPI's food component fell to +7.8%, "still hot relative to history but down considerably from peak of +13.9%."

The three-month annualized change in owners' equivalent rent, a measure of housing cost, "is still hot at +8.8%... hope is we've seen the peak," Sonders added.

"Today's report suggests we're on the road to a soft landing," said David Russell, vice president of Market Intelligence for TradeStation Group. "The Fed will keep talking tough and probably inch up the dot plot tomorrow. But we seem to have turned a corner on inflation. Santa could be coming to town this year."

On Monday, consumers' inflation expectations retreated some, according to New York Fed survey.