November CPI: Going Nowhere Fast

November’s CPI report delivered more evidence that progress in lowering inflation has stalled. Consumer prices rose 0.3%, pushing the 12-month change up to 2.7%. While a pickup in prices for food and gasoline contributed to the headline’s strength, excluding food and energy price growth also remained firm.

The core index advanced 0.3% for a fourth consecutive month.

Deflation among core goods showed further signs of petering out, prices rose 0.3%, which was the largest gain in a year and half. While much of the recent pickup can be traced to vehicle prices (used autos +2.0% and new vehicles +0.6%), the remaining core goods prices also edged higher over the month and are now little changed over the past year.

This mild reflation in core goods prices has offset the gradual, ongoing slowdown in core services inflation that has taken place in recent months.

Disinflation among core services remained painstaking slow despite a notable moderation in primary shelter inflation. Core services prices rose 0.3%. Both rent of primary residences and owners’ equivalent rent registered their smallest monthly increase in three and a half years, but expectations for the downward trend in this component to kick into faster gear has been widely anticipated. (…) However, price growth for medical care services, the second largest component of the core index behind shelter, rose 0.4%. Meantime, recreation services were up 0.7%, which also limited the overall deceleration in services prices.

Source: U.S. Department of Labor and Wells Fargo Economics

Core CPI inflation has been stuck between 3.2% and 3.3% since June. The lack of further progress comes as key categories are no longer rowing in the same direction, and fewer categories are seeing outright deflation.

Food and energy inflation is no longer subsiding after commodity prices have been range-bound for more than a year now. (…)

  

Source: U.S. Department of Labor and Wells Fargo Economics

Here’s Goldman Sachs’ 6m annual change chart:

The Powell “supercore” measure (services ex-energy/rent) also was +0.34% MoM for back-to-back months, though the YoY pace, while still lofty at +4.3%, did recede a touch from +4.4% in October.

John Authers offers some interesting charts:

Within services, both the Fed’s recently targeted “supercore” (services excluding shelter), and shelter itself have ticked up on a year-on-year basis. Shelter price rises fell over the last year but remain at about 5%, while the supercore bottomed a year ago. It remains above 4%.

There is more irritating news from specialist statistical metrics. The Cleveland Fed’s trimmed mean, excluding the greatest outliers in either direction, ticked up and remains just above 3%. Its measure of median inflation, and the Atlanta Fed’s on sticky prices that are hard to reduce, edged down but are only just below 4%. The mission is still not accomplished:

Blitz also offers his diffusion index of the proportion of CPI components where the three-month rolling average inflation is higher than the 12-month rolling average. It shows with minimal ambiguity that disinflation is over:

This is helping:

OPEC+ Supply Delay Won’t Prevent Oil Glut Next Year, IEA Says Group’s revised plans would leave 1.4 million-barrel surplus

(…) Even if OPEC+ cancels next year’s hikes entirely, there’ll still be an overhang of 950,000 barrels a day. (…) Global oil consumption will grow by 1.1 million barrels a day in 2025, or roughly 1%, according to the Paris-based IEA, which advises major economies. But it projects that supplies outside OPEC+ will expand by roughly 36% more, led by the US, Brazil, Canada and Guyana. (…)

The alliance has also struggled to ensure members abide by their agreed production limits. In November, they collectively exceeded quotas by a substantial 680,000 barrels a day, driven by the United Arab Emirates, Iraq and Russia, according to the IEA. (…)

OPEC’s secretariat in Vienna has retreated from its strongly bullish forecasts over the past few months, moving closer to the IEA’s more subdued outlook. OPEC has slashed projections for demand growth in 2024 by 27% in five consecutive monthly downgrades, with a reduction in its latest assessment on Wednesday the biggest so far.

But this is not:

CONSUMER WATCH

  Spending update: Resilient to the end

Consumers continued to demonstrate their resiliency, with no sign of waning in November and over the first few weeks of holiday spending. Bank of America aggregated credit and debit card spending per household was up 0.6% year-over-year (YoY) in November, after a 1.0% YoY increase the month before. On a seasonally adjusted (SA) basis, spending rose 0.1% month-over-month (MoM), rebounding from a 0.1% MoM decrease in October; the three-month seasonally adjusted annualized growth rate of spending was 2.3%. (…)

Importantly, this momentum carries across all income cohorts. Higher-income households’ spending in November continued to grow at a faster rate than for their middle- and lower-income counterparts, although this gap has narrowed in the past few months.

Wage growth is still a tailwind for the consumer. After-tax wage growth, based on Bank of America deposit data, for both lower- and higher-income households has cooled slightly since August, while middle-income wage growth is steadier. But, overall, after-tax wage growth remains solid for 2024.

Continued momentum in travel has been a theme of 2024 and this dynamic was on display again with record travel figures for the Thanksgiving holiday week (Monday through Sunday). The number of people passing through TSA checkpoints, a proxy for air travel, during Thanksgiving week was up 3% YoY over an already strong 2023 Thanksgiving week. Meanwhile, Bank of America card data shows that total gas transactions were up nearly 2% YoY, suggesting more consumers were also taking road trips. While gas purchases were up, spending was down 4% YoY on falling prices, providing a boost to consumers’ wallets.

(…) consumers are taking these [gas] savings and putting them towards experiences, with spending growth for services including restaurants up nearly 3% YoY in November relative to 2023.

And it’s not just the Thanksgiving holiday week that gave travel a boost. In fact, leading up to the Thanksgiving week, Bank of America customers spent 50% more YoY in Toronto when Taylor Swift’s Eras Tour was in town. Remarkably, this beat the spending lift from her summer concerts in Europe by 10 percentage points. (…)

Holiday spending was also up significantly in the two weeks around Thanksgiving (the Monday before Thanksgiving through the Saturday the week afterward) this year. Spending per household on holiday items rose a healthy 6.1% YoY compared to last year’s holiday period. While higher- and middle-income households outpaced, lower-income households still increased their spending by a strong 5.5% YoY.

Additionally, it appears consumers are increasingly looking online, either because of the convenience, or in search of bargains and deals (see: Is online spending creating new holiday hotspots?). Bank of America card data shows that online retail spending excluding gas, grocery, and restaurants during the two weeks around the Thanksgiving holiday was up 6.5% YoY, more than double the rate in 2023.

  

Will consumers’ impressive holiday spending give way to a more frugal New Year? We aren’t convinced. Alongside robust after-tax wage growth providing spending firepower, in our view, consumers do still have some capacity to tap ‘dry powder’ in the form of both savings and borrowing. This means they have resources to spend faster than their wages are growing.

One consideration here is the degree to which consumers continue to have elevated deposits. In Bank of America aggregated customer deposit data, savings and checking balances do still appear to be above 2019 levels, though have been falling gradually over time. These balances tend to have a seasonal pattern, for example increasing around April each year as tax refunds are received. The YoY decline indicates the drop is easing – likely in part because inflationary pressures have also eased. (…)

  

And, perhaps most fundamentally, after-tax wages have risen significantly since 2019, especially for lower-income households. This has allowed for a rise in both credit card and debit card spending, so that the share of total spending currently via credit card is not considerably higher than similar periods in earlier years. And the overall debt position of households as a percentage of income is not showing signs of deterioration. (…)

  

Per the Atlanta Fed, wages are up 4.3% YoY in November, down from 4.6% in August. Job switchers: +4.6%, unchanged since August.

The squeeze from inflation on “essentials” is easing amid steady wage growth:

And the “wealth defect” is still very much alive. The bond market is worried:

Especially with the Fed still cutting rates…

China Signals More Fiscal Stimulus, Rate Cuts to Boost Economy

China signaled further stimulus measures including raising its budget deficit in 2025 at a key economic meeting that sets policy priorities for the coming year.

Top officials led by President Xi Jinping also vowed to deliver rate cuts and lower the reserve requirement for banks during a two-day huddle of the Central Economic Work Conference in Beijing, according to China Central Television.

The latest pledges follow a commitment made at the December huddle of the decision-making Politburo earlier this week to pump more stimulus into the economy. It included the first shift in China’s monetary policy stance in 14 years to a “moderately loose” strategy, and signaled determination to support demand.

• Digging deep into the multiplier effect, many places have started a new round of consumer voucher distribution

Beijing will issue no less than 30,000 ice and snow consumption coupons, Changzhou, Jiangsu will issue 1 million yuan of 2024 “Su Xin Consumption·Welcoming the New Year’s Day” consumption coupons, and Xi’an will start a new round of consumption coupons… With the arrival of the year-end consumption peak season, many places have launched a new round of consumption voucher distribution activities to increase support for consumption areas such as catering, culture and tourism.

At 10 a.m. on December 7, the first batch of the third round of “Lepin Shanghai” catering consumption vouchers was issued on time, with four vouchers all offering a 30% discount. The vouchers were sold out in seconds. The first round of 40 million “Eat in Guangzhou” catering consumption vouchers issued on December 4 were all claimed within 15 minutes. (…)

Chen Qiang, manager of Haidilao Hotpot Shanghai Bund Store, said that judging from the data, the role of consumption vouchers in stimulating consumption has been steadily increasing. “Take our store as an example. The number of guests received on weekends has increased by 3 to 5 percentage points compared with the same period last year. About 15% of customers have shown and used consumption vouchers, which is about 5 percentage points higher than before.” Meituan data shows that driven by the “Enjoy Pudong” consumption vouchers, the amount of dine-in consumption in Pudong New Area in November increased by 19.8% month-on-month compared with October, and the average number of dine-in consumers per day increased by 10.8% month-on-month.

“The issuance of consumption vouchers can produce a ‘multiplier’ effect and drive economic activities on a larger scale. As a short-term stimulus measure, consumption vouchers will quickly boost consumer confidence, activate market demand, and at the same time drive the recovery and development of related industries. In particular, the current precise distribution of consumption vouchers in different fields and batches in various places will help guide consumption direction and optimize consumption structure.” said Zeng Fu’e, professor at the School of Economics and Management of Wuhan University. (…)

Voucher programs can help kickstart consumption but often only act as short term boosters if consumer confidence is not improving.

China Comes Out Swinging as Trump Trade War Looms Recent moves on Nvidia, critical minerals and drones signal the sort of retaliatory measures Beijing could use to hit back against U.S.

During Donald Trump’s first administration, China learned that it couldn’t match the much larger U.S. economy tit-for-tat when it came to tariffs, and quickly found other ways to try to inflict pain—often by borrowing from his playbook.

Now, as Trump’s second stint in office approaches, Beijing is brandishing an expanded arsenal of countermeasures that it is likely to draw upon as the president-elect threatens across-the-board tariffs and levies of as high as 60% on Chinese-made goods.

In recent days, Beijing has launched a regulatory probe into U.S. semiconductor champion Nvidia, threatened to blacklist a prominent American apparel maker, blocked the export of critical minerals to the U.S. and squeezed the supply chain for drones, offering clues into how non-tariff measures are likely to dominate China’s tool kit.

Because the U.S. buys so much more from China than the other way around—roughly three times as much—Beijing simply can’t hit back dollar for dollar when it comes to tariffs. Doing so would also risk exacerbating the myriad woes in China’s economy.

Instead, as with any fight against a larger foe, it pays to find unique points of leverage to exploit—with many of its efforts to inflict pain on the U.S. coming from Washington’s own strategies. (…)

Beijing’s warning to PVH [owner of the Calvin Klein and Tommy Hilfiger brands] came a day after the U.S. proposed a ban on the use of Chinese and Russian components in connected vehicles on U.S. roads. If placed on the list, PVH could be banned from selling to and buying from China—locking the company out of a fast-growing market that accounted for 6% of its global revenue last year. (…)

China continues to dominate the global supply of batteries and motors that small aircraft such as quadcopters and first-person-view drones need to fly. China supplies more than 90% of the magnets used in the motors that power missiles, ships, drones and satellites. Circuit boards are delivered faster and cheaper from China.

A Mavic drone from Chinese producer DJI—the world’s largest small-drone manufacturer and one designated as a national-security threat by the U.S. government—costs up to $4,000, while a comparable drone made elsewhere using non-Chinese components can cost up to $15,000, according to Yurii Poita, an analyst at Ukraine’s Center for Army, Conversion and Disarmament Studies.

Top Bankers See US as Bright Spot as Second Trump Term Nears

A chorus of top bankers said they are feeling positive about the prospects for the US economy under President-Elect Donald Trump and think his tariff threats will be manageable.

At the same time, many senior financiers and asset managers at Bloomberg’s Women, Money and Power conference on Tuesday said they see Europe facing slower growth and political division that will hold the continent back. Both regions will need to tackle inflationary pressures that have eaten into people’s living standards, the executives said at the gathering. (…)

“One thing that works in Europe and Brussels is, ‘Oh my God, the Americans are going to get ahead again’,” Botin said. “That’s the one thing that seems to work.”

Anne Walsh, chief investment officer of Guggenheim Partners Investment Management, said markets had failed to price in the risk of France’s political chaos following a no-confidence vote earlier this month. Germany’s economy is also facing “recession pressures,” she added.

“On a fundamental basis, Europe has struggled and I think will continue to do so,” she said. (…)

The event’s speakers offered a generally positive view of the US economy, with business figures predicting that Trump’s vows to impose wide-ranging cross-border tariffs would be watered down.

The incoming administration “are probably going to use the tariffs as a bargaining chip and it probably will not be as bad” as many fear, according to Paula Volent, chief investment officer of Rockefeller University’s $2.5 billion endowment. (…)

Here’s how tariffs work per a BBC piece:

In practical terms, a tariff is a domestic tax levied on goods as they enter the country, proportional to the value of the import.

So a car imported to the US with a value of $50,000 subject to a 25% tariff, would face a $12,500 charge.

The charge is physically paid by the domestic company that imports the goods, not the foreign company that exports them.

So, in that sense, it is a straightforward tax paid by domestic US firms to the US government.

Over the course of 2023, the US imported around $3,100bn of goods, equivalent to around 11% of US GDP.

And tariffs imposed on those imports brought in $80bn in that year, around 2% of total US tax revenues.

If the US importing firm passes on the cost of the tariff to the person buying the product in the US in the form of higher retail prices, it would be the US consumer that bears the economic burden.

If the US importing firm absorbs the cost of the tariff itself and doesn’t pass it on, then that firm is said to bear the economic burden in the form of lower profits than it would otherwise have enjoyed.

Alternatively, it is possible that foreign exporters might have to lower their wholesale prices by the value of the tariff in order to retain their US customers.

In that scenario, the exporting firm would bear the economic burden of the tariff in the form of lower profits.

And/or the currency of the exporting country is allowed to decline, partly or fully offsetting the higher tariffs for the importer.

• China’s yuan slid on a report Beijing is considering allowing the currency to weaken in response to the threat of a trade war with the US.

The BBC continues:

But economic studies of the impact of the new tariffs that Trump imposed in his first term of office between 2017 and 2020 suggest most of the economic burden was ultimately borne by US consumers.

A survey by the University of Chicago in September 2024 asked a group of respected economists whether they agreed with the statement that “imposing tariffs results in a substantial portion of the tariffs being borne by consumers of the country that enacts the tariffs, through price increases”. Only 2% disagreed.

Trump imposed a 50% tariff on imports of washing machines in 2018.

Researchers estimate the value of washing machines jumped by around 12% as a direct consequence, equivalent to $86 per unit, and that US consumers paid around $1.5bn extra a year in total for these products.

There is no reason to believe the results of even higher import tariffs from a future Trump administration would be any different in terms of where the economic burden would fall.

The non-partisan Peterson Institute for International Economics has estimated Trump’s new proposed tariffs would lower the incomes of Americans, with the impact ranging from around 4% for the poorest fifth to around 2% for the wealthiest fifth.

A typical household in the middle of the US income distribution, the think tank estimates, would lose around $1,700 each year.

BTW:

Trump imposed tariffs on solar panels and washing machines at the start of 2018, moves that might have pushed up prices in those sectors even though they also overlapped with plans to open washing machine plants in Tennessee and South Carolina.

His administration also levied tariffs on steel and aluminum, including against allies. He then increased tariffs on China, leading to a trade conflict and a limited 2020 agreement that failed to produce the promised Chinese purchases of U.S. goods.

When Trump first became president in 2017, the federal government collected $34.6 billion in customs, duties and fees. That sum more than doubled under Trump to $70.8 billion in 2019, according to Office of Management and Budget records.

While that sum might seem meaningful, it was relatively small compared with the overall economy. America’s gross domestic product is now $29.3 trillion, according to the Bureau of Economic Analysis. The total tariffs collected in the United States would equal less than 0.3% of GDP.

If Mexico, Canada, and China faced the additional tariffs proposed by Trump on all goods imported to the United States, that could be roughly equal to $266 billion in tax collections,

Goldman Sachs’ research warns “that a 10% across-the-board tariff will boost core prices by about 1% and delay a return to the Federal Reserve’s 2% inflation goal.”

Incoming Treasury Secretary Scott Bessent, expected to be the voice of temperance in the Trump administration, said that “tariffs can’t be inflationary because if the price of one thing goes up, unless you give people more money, then they have less money to spend on the other thing, so there is no inflation.”

But Trump has also promised to cut taxes, giving people more money…

Importantly, Bessent also said in various recent interviews and articles:

• “Last year, we imported some $3.1 trillion in goods. We are the largest importer in the world and thus the single most important market for other countries’ exports. Our size gives us market power and the ability to dictate terms — other countries need us more than we need them. We have but to use that power.”
• “Tariffs are also a useful tool for achieving the president’s foreign policy objectives. Whether it is getting allies to spend more on their own defense, opening foreign markets to U.S. exports, securing cooperation on ending illegal immigration and interdicting fentanyl trafficking, or deterring military aggression, tariffs can play a central role.”
• Trump’s threats of steep levies on Chinese imports as a “maximalist negotiating position.”
• “The last thing President Trump wants is create inflation”
• “Tariffs are a one-time price adjustment.”
• “I would recommend that they would be layered in gradually.”

Yesterday:

Trump picks China hawk to be top State Department economic policy official

President-elect Donald Trump has tapped Jacob Helberg to be the State Department’s top economic policy and trade official, selecting a China hawk for an integral role in U.S. efforts to secure supply chains.

The undersecretary of State for economic growth is often referred to as the senior U.S. economic diplomat and advises the secretary of State on international economic policy. They also oversee bureaus that manage policy around tech, energy resources, global food security and the environment.

In a Truth Social post on Tuesday, Trump said Helberg, one of the leaders in the push to ban Chinese-owned social media platform TikTok, will be “a champion of our America First Foreign Policy” as undersecretary of State for economic growth, energy and the environment. He added that Helberg “has the knowledge, expertise, and pragmatism to defend America’s Economic interests abroad.” (…)

Helberg, a tech executive who serves as a member of the U.S.-China Economic and Security Review Commission, has been an advocate for a more muscular policy toward Beijing. In 2023, he founded the Hill and Valley Forum, which brings together venture capitalists and lawmakers concerned about the rise of China and its impact on the U.S. tech sector. (…)

Trump’s mention of Helberg’s pragmatism is noteworthy. Scott Bessent is also know as a pragmatic.

Now this:

US Considers New Russia Oil Sanctions to Weaken Putin Ahead of Trump Biden looks for ways to sap Kremlin’s war machine in Ukraine

The Biden administration is weighing new, harsher sanctions against Russia’s lucrative oil trade, seeking to tighten the squeeze on the Kremlin’s war machine just weeks before Donald Trump returns to the White House.

Details of the possible new measures were still being worked out, but President Joe Biden’s team was considering restrictions that might target some Russian oil exports, according to people familiar with the matter who asked not to be identified discussing private deliberations. (…)

One model for broader US sanctions could be to impose restrictions similar to those on Iranian oil. In that case, buyers of the oil face US punishment. Such a move would be fraught with risk, given that powerful countries including India and China are major consumers of Russian crude.

Most immediately, such limits could spike oil prices, causing global economic strain. (…)

Importantly when discussing inflation in the U.S.:

Productivity increases 2.2% in Q3 2024; unit labor costs increase 0.8% (annual rates)

Nonfarm business sector labor productivity increased 2.2 percent in the third quarter of 2024, the U.S., reflecting no revision from the preliminary estimate. Output and hours worked were also unrevised, increasing 3.5 percent and 1.2 percent respectively. (All quarterly percent changes in this release are seasonally adjusted annualized rates.) From the same quarter a year ago, nonfarm business sector labor productivity increased 2.0 percent in the third quarter of 2024, as previously reported.

Unit labor costs in the nonfarm business sector were revised down 1.1 percentage points to an increase of 0.8 percent in the third quarter of 2024, reflecting an equivalent downward revision to hourly compensation to an increase of 3.1 percent. Unit labor costs increased 2.2 percent over the last four quarters. (…)

  

During the current business cycle, starting in the fourth quarter of 2019, labor productivity has grown at an annualized rate of 1.8 percent, reflecting a 2.5-percent rate of growth in output and a 0.7-percent rate of growth in hours worked. These rates are not revised from the preliminary third-quarter estimates. The 1.8-percent annualized rate of productivity growth in the current business cycle thus far is higher than the 1.5 percent rate of the previous business cycle from the fourth quarter of 2007 through the fourth quarter of 2019.

Manufacturing sector labor productivity increased 0.9 percent in the third quarter of 2024, a 0.1-percentage point downward revision from the preliminary estimate. This revision reflects a 0.2-percentage point downward revision to output to a decrease of 0.4 percent and a 0.1-percentage point downward revision to hours worked to a decrease of 1.3 percent. (…)

Total manufacturing sector productivity increased 0.6 percent from the same quarter a year ago.

Unit labor costs in the total manufacturing sector were revised down 3.6 percentage points to an increase of 1.7 percent in the third quarter of 2024, primarily reflecting a 3.8-percentage point downward revision to hourly compensation. Manufacturing unit labor costs increased 1.8 percent from the same quarter a year ago.

Manufacturing sector labor productivity has grown at an annualized rate of 0.2 percent during the current business cycle, as output has netted no growth and hours have declined 0.2 percent. The 0.2-percent annualized rate of productivity growth in the current business cycle thus far is above the 0.1-percent rate of the previous business cycle from the fourth quarter of 2007 through the fourth quarter of 2019, and is below the long-term rate of 2.1 percent since the first quarter of 1987.

Preliminary measures for the third quarter of 2024 were announced today for the nonfinancial corporate sector. Productivity increased 3.4 percent in the third quarter of 2024 as output increased 4.2 percent and hours worked increased 0.8 percent. Productivity increased 3.9 percent over the last four quarters. Unit profits of nonfinancial corporations increased 0.5 percent in the third quarter of 2024 and increased 1.1 percent over the last four quarters.