Hi, my name is Meera Pandit, Global Market Strategist at JP Morgan Asset Management. Welcome to On the Minds of Investors. Today's topic, is inflation finally slowing? November CPI report showed a second straight month of softening inflation, despite still elevated price growth. Headline CPI increased 1/10 of percent on a monthly basis and 7.1% year over year, while core CPI, ex food, and energy increased 2/10 of a percent over month, and 6% on a year over year basis, all below consensus expectations.

How will the Fed interpret the CPI report in the final meeting of the year? On November 30, Chair Powell gave a speech at the Brookings Institution and shared that the FOMC is thinking about three categories of inflation core goods, housing services, and services ex housing. These categories experience the following developments in November.

Core goods, core goods fell 5/10 of a percent a monthly basis, reflecting declines in energy and used car prices, flat new car prices, and modest increases in apparel. Higher commodity prices had been a key driver of higher inflation. But after a surge in energy prices earlier this year, both WTI oil and gas prices are essentially flat compared to a year ago. In addition supply chain pressures, another major driver of higher prices have mostly normalized and demand for goods is slowing.

Housing services, shelter continues to increase at a strong pace up 6/10 of a percent on a month over month basis. However, the shelter measure is comprised of rent and owners equivalent rent, not housing prices. So there is typically a lagged impact. Shelter prices are likely to continue to increase in 2023 before moderating.

Services ex housing, due to the lagged effect on shelter prices, the Fed is focused on services outside of housing to gauge services demand, which was flat month over month. In November airline fares, hotels, and medical services declined . Restaurant prices continued to rise, although at the slowest pace since March. This report reflects welcome progress on both core goods and services ex housing.

Shelter was the largest contributor to the monthly increase and will take some time to subside, although that is well understood by the Fed as they assess inflation. Softer inflation could allow for a lower terminal federal funds rate, with the Fed pausing and holding in early 2023. A Fed pause, slowing inflation, and weakening economic growth should result in falling-- falling yields next year. So investors should consider adding duration. Although equities have rallied on this cooler print, headwinds to growth and earnings could put a ceiling on equity prices.