Inflation Was Better Than Expected in November. What That Means for the Fed, and for You

An image of Federal Reserve Chairman Jerome Powell is used to illustrate an article about inflation. Credit: Getty Images
Federal Reserve Chairman Jerome Powell is set to announced the central bank’s next rate hike this week. He’ll do so as part of a campaign to bring down the highest inflation in 40 years, which has shown signs of improving.
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Prices rose by less than expected in November, pointing to progress in the fight against the highest inflation in 40 years.

Signs of improving inflation could mean fewer — and slower — rate hikes by the Federal Reserve, which is set to announce its next increase this week. It could also affect mortgage rates, which have already dropped significantly since October’s encouraging inflation report.

Improving inflation numbers could be a sign that the Fed’s efforts are working, says Christine Cooper, chief economist at CoStar Group, a real estate analytics provider. 

The Consumer Price Index reported inflation was 7.1% year-over-year in November, meaning prices of a broad selection of goods have risen, but less than expected. Markets and experts had expected the figure to be around 7.3%, after the report showed 7.7% annual price growth for October.

“Any month-over-month reading can be a little volatile, but I think there’s a little more confidence now that price pressures are easing,” says Angelo Kourkafas, a CFA and investment strategist at Edward Jones.

In terms of what you should do with your money, a couple of positive inflation reports still aren’t enough to let your guard down yet, says John McCafferty, director of financial planning at Edelman Financial Engines, a national financial planning firm. In either case, you should focus on having enough cash on hand to weather any storm, particularly potential job loss in a recession. “Keep it simple,” he says. “Liquidity is really important.”

What the Latest Inflation Data Mean for the Federal Reserve’s Rate Hikes

The Federal Reserve’s Federal Open Market Committee meets this week, with another increase to its benchmark short-term interest rate expected to be announced Wednesday. That rate, the federal funds rate, directly determines what banks charge each other to borrow money, but it also ripples through the rest of the financial system, dictating interest rates for products ranging from savings accounts to home equity loans.

Experts and financial markets generally expect the Fed to raise the federal funds rate by half a percentage point, a sign of slower tightening after four consecutive hikes of three-quarters of a point. 

“There’s a lot of hope that that’s going to be close to the end of” rate hikes and high inflation, Cooper says.

The central bank is likely getting closer to what’s called the terminal rate, experts say, the maximum level it’ll raise rates in its bid to calm down inflation. What Chairman Jerome Powell and other Fed officials indicate about what they expect that terminal rate to be will likely determine how financial markets react.

“The market has already been pricing in over the past two months that that terminal rate is moving higher. It’s been stable now for a couple of points at 5%,” Kourkafas says. “Expectations might not need to shift further than they already have.”

If projections for the terminal rate are higher than expected, that could be an unpleasant surprise for the stock market and push mortgage rates higher, Kourkafas says.

The latest inflation data will also dictate what the Fed does next year — how much it raises rates in the new year, when it stops, and eventually when it starts to bring rates back down.

“If inflation is a little bit stickier, it would give more ammunition to the FOMC to add another 50 basis points in February and March,” Cooper says. 

What Will the Economy Look Like in 2023?

As has been the case for much of 2022, fears for 2023 center on the possibility of a recession. The Fed’s dramatic ratcheting of interest rates could slow the economy so much that it shrinks, causing more job losses and financial pain

While high interest rates and inflation are creating headwinds, the economy does face some continued tailwinds. One is that the labor market remains more resilient than expected, Kourkafas says. The unemployment rate is still low, at 3.7%, although that figure fails to capture the whole job market, including those who are underemployed or not looking for work.

“Even though we do expect the unemployment rate to rise moderately, there are still a lot of job openings that need to come down before we see a meaningful uptick in unemployment or job losses,” Kourkafas says. “The fact that companies have had such a hard time filling those open positions might make them reluctant to lay off even though demand for products and services is slowing.”

A recession isn’t a guarantee. The economy might be able to make a “soft landing” and avoid major issues. Part of that is because markets have already priced in higher interest rates and prepared for the possibility of a recession. “It becomes less of an issue because it all just gets baked in,” McCafferty says.

How Can You Prepare for What’s Next?

Everyone has their own predictions and expectations about what’s coming next year for the economy, but history is filled with bad guesses. It’s best to be ready for anything.

Keep More Money Handy

A potentially turbulent economy that will likely feature job losses is scary. It’s less scary if you have an emergency fund on hand to weather a layoff. “The best way to be proactive and deal with uncertainty is to build up cash reserves and track your spending to the extent necessary,” McCafferty says.

Where you keep that money is important. While rising interest rates have led to better returns on things like certificates of deposit, McCafferty says your primary goal should be to be able to access that cash as quickly as possible. 

“Keep it liquid, keep it available. Don’t chase yield. Don’t lock up your money,” he says. “The more barriers you put between you and your money, that’s a problem. If you have a high-yield savings account, maybe it’s 2%. That’s all you need.”

Be Cautious About New Debt

Rising interest rates mean it’s more expensive to borrow money. Combine that with the increased possibility of incomes being affected by layoffs or corporate cost-cutting, and experts say consumers should be wary of taking on more than they can chew in terms of new payments.

“If I was not secure in my job, I’d be a little bit more concerned that might hit me. I’d want to not take on additional debt because that cost will increase as well,” Cooper says. “It’s just taking care to not get yourself too ahead of what we can manage if there is a recession for two quarters.”

Don’t Worry Too Much About Investments

Beyond a general caution about the future, experts say the day-to-day volatility of this week and the ensuing months shouldn’t prompt you to fret about your investments. Investing is for the long term, and you should stick to a strategy that works for you, despite the ups and downs of the market.

McCafferty says the advice is simple, especially for those who are still decades away from retirement: “If you’re not retiring for 20 years, you should be in nothing but stocks. You should have cash reserves, and you should be in nothing but stocks.”

Pro Tip

In a volatile economy, it’s important to keep cash on hand. Don’t lock up this money in a CD or bonds, either. You need to be able to access it when you need it.