Originally Published: 22 DEC 23 08:33 ET

Updated: 22 DEC 23 10:43 ET

By Alicia Wallace, CNN

New York (CNN) — After three-plus years of prices steadily — and sometimes sharply — increasing month after month after month, they fell in November.

Last month, for the first time since April 2020, prices fell on a monthly basis, according to a closely watched report released Friday by the Commerce Department.

US inflation slowed further in November, and consumer spending continued to outpace expectations, lending further credence to the idea that the US Federal Reserve could stick its “soft landing” of bringing down inflation with a barrage of interest rate hikes while not throttling the economy into a recession.

November’s Personal Consumption Expenditures price index, a comprehensive measure of prices US households pay for goods and services, declined 0.1% from the month before, bringing the annual inflation rate to 2.6%.

It’s the first time the headline PCE index decreased on a monthly basis since the early stages of the Covid-19 pandemic. Annually, it’s a marked improvement from a 2.9% rate in October and the 40-year high of 7.1% notched in June 2022.

Tumbling gas prices — energy prices dropped 2.7% from October — drove the swing into negative territory, according to the report.

“This trend is as graceful and encouraging as anybody could have hoped for when the Fed started lifting rates,” Matt Colyar, Moody’s Analytics economist, told CNN. “It’s another good, solid report, and it’s becoming increasingly [evident] that what the Fed has done has not initiated a recession and has coincided with their main goal, which is prices back down toward their 2% target.”

The Federal Reserve’s favored inflation gauge — the “core” Personal Consumption Expenditures price index that excludes energy and food prices — also cooled to 3.2% for the year ended in November. That’s a step back from October’s annual increase of 3.4% and a step closer to the central bank’s 2% target rate.

The core PCE price index is at its lowest annual rate since March 2021.

“More importantly, the six-month annualized average rate of inflation is now up 1.87%, indicating easing inflation pressures in contrast with the 4% pace of core inflation during the first six months of the year,” Joe Brusuelas, principal and chief economist at RSM US, wrote in a note on Friday. “These data are consistent with a strong and growing economy bolstered by income gains above inflation and a dynamic labor market as inflation eases.”

Economists were expecting core inflation to rise by 0.2% from the month before and for an annual increase of 3.4%, according to consensus estimates on FactSet.

A deflationary month

The PCE price index’s first monthly drop since April 2020 is a welcome change of pace for Americans who have been hammered by high inflation since early 2021.

However, while deflation has been occurring in pockets (notably, goods), too much of it can be a bad thing.

A monthly decline, especially in the headline PCE index, is not representative of a deflationary economy, Gus Faucher, senior vice president and chief economist of the PNC Financial Services Group, told CNN in an interview Thursday in advance of the inflation report.

Monthly data is preliminary and frequently revised. Additionally, the overall index is far more sensitive to the often-volatile swings from components like food and energy. An oil price spike, weather events or unexpected animal illnesses could have significant effects in a short period of time.

“Absent a recession, it’s difficult to see overall deflation in the economy, because I think the labor market is going to remain solid, and we will continue to see wages growing and going up at a pace that is consistent with 2% inflation,” he said.

He added: “The Fed very much wants to avoid deflation; so, if we see inflation slowing, moving below 1%, I think we see the Fed cutting rates in order to head off deflation.”

During the Federal Open Market Committee last week, when central bankers once again kept rates steady, policymakers signaled that a trio of rate cuts could come in 2024.

“If core PCE keeps ticking up by 0.1% and almost rounding down to zero, then [the Fed has] a lot of leeway to begin cutting rates,” Colyar said. “There certainly hasn’t been any sign that they should deviate from [their projections last week.]”

Household finances remain healthy

The Commerce Department’s latest Personal Income and Outlays report also showed that consumer spending increased 0.2% from the month before. Economists had expected it to remain flat.

When adjusting for inflation, spending ramped up 0.3% on the month.

“There is no glaring fault line in the household balance sheet, and the proof positive is the continued strength in consumer spending that we’ve seen,” Moody’s Analytics economist Matt Colyar said in an interview Friday.

There’s still one big holiday shopping weekend to come, but consumers got a strong start to the critical spending season with robust — and, in some cases, record — spending on Black Friday and Cyber Monday.

Friday’s report showed that spending on goods increased 0.5% from October and services increased 0.1%. Playing to the post-pandemic theme of consumers shelling out for experiences and entertainment, the largest gainers in goods sales were in the recreational goods and vehicles category.

Friday’s report is yet another confirmation that consumers aren’t as financially tapped out as economists initially thought they would be at this time of year.

Last week, the Commerce Department reported that sales at US retailers rose 0.3% for the month, according to data that’s adjusted for seasonality but not inflation. Economists had expected those sales to fall by nearly that amount.

“The retail sales numbers were good, we continue to see job growth and wage gains, and that is supporting consumer spending growth in late-2023,” Faucher said.

Household finances remained strong in November, with personal income growing 0.4%, a slight acceleration from the 0.3% increases seen in the two months prior.

Savings grew as well. The personal saving rate (savings as a percentage of disposable income) ticked higher to 4.1% from 4% the month before.

The months of slowing inflation and stable and strong labor market conditions are helping Americans feel better about the overall economy and its direction.

Earlier this week, the December Consumer Confidence Index jumped to its highest level since July, according to the monthly report released by the Conference Board. And separately on Friday, a report from the University of Michigan showed that its measure of consumer sentiment spiked nearly 14% from November.

CNN’s Bryan Mena contributed to this report.

The-CNN-Wire