The consumer price index (CPI) flatlined in November as lower prices at the pump helped stem overall inflation gains. Transportation prices also dropped, which was in the opposite direction of November’s producer price index increase of 0.3%. Many large retailers announced that they would waive shipping costs during the holiday season, which will squeeze retailer margins.

The CPI slowed from a 2.5% pace on a year-over-year basis in October, to a 2.2% pace on a year-over-year basis in November. This, coupled with the recent increases in wages, supports our forecast for a strong holiday season. Discretionary spending is expected to be particularly strong as consumers spend the extra cash generated by lower prices at the pump. Food and dining out tend to do especially well when consumers have a little extra cash after they fill their tanks. Spending at actual gas station convenience stores is among the most sensitive to changes in prices at the pump.

The boost from lower prices at the pump will play out as we move into 2019, barring another major drop in oil prices. OPEC is attempting to cut production, while growth abroad appears to have firmed slightly after a soft spot this summer.

The core CPI which strips out the volatile food and energy components rose 0.2% during the month and 2.2% on a year-over-year basis. That marks a slight acceleration from October’s pace, and is up a full half percent from last year’s inflation level. A sharp increase in used car prices and ongoing strength in shelter costs was partially tempered by a drop in apparel prices and a temporary retreat in transportation costs.

Today’s inflation data coupled with yesterday’s read on producer prices, which surprised on the upside, suggests that the Federal Reserve will move forward in December with their fourth rate hike this year. The Fed is expected to then lay out a rational for a pause and more flexibility for rate hikes in 2019. The Fed still sees rates below the tipping point between stimulative and restrictive on growth, but are now more concerned about how much the economy could slow in 2019.

Bottom Line

Inflation has warmed with the economy over the last year, which is something the Fed welcomes. Rate hikes have merely acknowledged the return to more normal inflation levels. The Fed’s job is to pace us in what has become a marathon of an expansion, not stop the economy before the finish line. Hence, the Fed is likely to pivot in 2019 and tread with more caution on rate hikes.