Consumer prices grew by 0.8% in November and are 6.8% higher than a year ago, the Bureau of Labor Statistics recently reported. The figures matched expectations, so long-term interest rates hardly budged and markets mostly shrugged off the news. Still, there's plenty to take from the results. Let's consider the good, bad and ugly.

The Good: Core Inflation Grew Substantially Less

Pushing the headline rate higher were prices for energy, up a whopping 3.5% in November, and food, up by 0.7%. Historically, prices for these categories are volatile, which is why they’re excluded from the core index. Core inflation came in much slower and saw a drawdown from October’s reading. While not indicative of a persistent loss in spending power, it’s not good news that households are seeing rising prices at the pump and on grocery store shelves, denting wallets during the holiday travel season. The gasoline component of energy prices grew by 6.1% in November and is up by 58.1% year over year.

The Bad: Inflation To Likely Remain Hot

Seeing prices rise for items they frequently purchase is influencing how consumers view the future path of prices. The Federal Reserve Bank of New York reported that median consumer expectations for inflation one year ahead rose to 6.0% in November, 30 basis points higher than a month ago, while expectations for inflation three years ahead fell to 4.0% from 4.2% in October. Survey respondents reported feeling somewhat unsure about the path of inflation that far ahead, which all in all is pretty good news. When consumers expect prices to rise in the near future, they tend to front-load purchases, which at this point would only exacerbate ongoing shortages — and add pressure to price increases — of many goods. With consumers not all that sure where prices are headed after next year, these behaviors are not baked in yet.

In the near term, though, year-over-year inflation will likely remain high, which could encourage workers to demand higher wages. Any increase in labor costs could be passed on to higher prices, given the pricing power that firms currently enjoy, inducing more inflation. Base effects also are likely to play a role in early 2022. Last December through February 2021, the consumer price index grew by 0.2%, 0.3% and 0.4%, respectively. Those low values will drop out of year-over-year calculations soon and be replaced with higher month-over-month figures in the next three months.

Any leverage workers may have in actually securing wage gains seems promising, given the still strong demand for labor. Job openings rose to 11 million at the end of October, according to the Bureau of Labor Statistics, up from 10.6 million the previous month and 6.9 million a year before. The highest job openings rate is in the leisure and hospitality industry, where weekly and hourly wages are among the lowest of all industry sectors. Given the difficulty hotels and restaurants are having filling these positions, it’s no surprise that the sector has seen the highest wage growth.

To combat inflation, the Federal Reserve Board will likely pivot to more aggressive tapering of asset purchases. Yet any change in the federal funds rate could be months away, meaning inflation can remain elevated before policy changes take effect.

The Ugly: Supply-Chain Bottlenecks Distort Prices Disproportionately

Aside from challenges in the labor market, a shortage in microchips over the past year continues to put a brake on production in the automobile industry, leading to low inventories at auto dealerships and pushing car prices higher. Used car prices grew by 2.9% in November and are 31.4% higher than a year ago. New vehicle prices are also much higher and garner headlines, but these figures are adjusted by the Bureau of Labor Statistics to account for technological changes that affect reliability, durability, safety and fuel economy, distorting growth rates of actual sale prices.

Despite low inventories and higher prices, demand for automobiles remains robust as many commuters avoid public transportation for health concerns and as workers with flexible telecommuting options have moved farther away from their offices, making walking or public transportation a less viable option.

It’s no surprise that the recent inflation spike has almost all been due to rising prices of goods. During the pandemic, households loaded up on furniture, sports and exercise equipment and automobiles, while cutting back on services that were either unavailable or under restriction, such as air travel, eating out or going to shows and concerts. The oversize demand for goods strained supply chains that were already struggling under COVID-related shortages — including of labor — which inevitably led to higher prices.

Meanwhile, price inflation for services remains quite subdued.

Looking ahead, rising coronavirus cases across many parts of the U.S. and a growing concern over the omicron variant could pose a risk to prices of certain goods items if they further disrupt the supply chain. And in service industries, rising labor costs, such as in the hospitality industry, should only add to growing health care concerns among workers returning to service jobs, contributing further to cost and price increases in those sectors.

What We’re Watching …

With the holidays upon us, attention will be focused on travel patterns, retail spending and unfortunate weather events. The second half of the month, however, will deliver updates on the housing market in the final quarter of the year. Demand for housing has been incredibly strong during the pandemic as urban dwellers and remote workers expanded their searches for housing and their desire for larger spaces. But at the same time inventories have shrunk to historic lows. Skyrocketing home prices have eroded affordability and pushed would-be buyers out of the market, cooling demand.

CoStar Economy is produced weekly by Christine Cooper, managing director and chief U.S. economist, and Rafael De Anda, associate director of CoStar Market Analytics in Los Angeles.