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Yes Virginia, there is disinflation

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November’s inflation slowdown shouldn’t be that surprising, but US equity markets are on a tear anyway.

The consumer price index rose at a 7.1 per cent annualised pace in November, compared with a 7.7-per-cent increase the month before. That is inarguably good news for the US economy, especially because the jobs market was so hot in that time.

Even so, the improvement was partly driven by deflation in energy prices, used cars and airfares — rent costs are still accelerating at a steady clip, up 0.8 per cent from the prior month, compared to 0.7 per cent the month before.

Food inflation has slowed since the start of the year, but most of the slowdown in inflation November came from restaurants. Hotel and travel-lodging costs posted an outright decline. (As anyone with children will tell you, several rounds of colds, Covid, flu and RSV have been making it challenging for families to be out and about as the weather has gotten colder.)

This probably confirms that the Federal Reserve will raise rates by 50 basis points on Wednesday, removing uncertainty about larger rate increases.

That is helpful for investors . . . but is it “Nasdaq Composite up 3 per cent” helpful? After all, Fed officials and Fed whisperers have been assuring readers of a 50-basis-point hike pretty consistently over the past several weeks. It’s been overwhelmingly priced in.

Or, as Fitch chief economist Brian Coulton puts it in a press release:

There is slightly better news here on the core inflation front, with the y/y rate slowing to 6.0% (from 6.3% in October) and the m/m rate to 0.2% (from 0.3%). But a big part of this relates to falls in used car prices reflecting the easing of global manufacturing supply chain pressures. That probably doesn’t have much to do with the tightening of monetary policy to date. Services inflation, on the other hand, increased again to 6.8% y/y. In the context of still tight labour market conditions, this will worry the Fed.

But hey, it’s almost the holidays! Maybe the magic of the season will allow looser financial conditions (ie rallying stonks) to coexist with decelerating inflation.

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