Inflation continued to surge in October, mostly on the back of seasonal influences that boosted the cost of energy, transportation and food, sending the consumer price index up by 6.2% on an annual basis, a three-decade high.
This data will complicate the Federal Reserve’s patient stance on rising prices.
This data will complicate the Federal Reserve’s patient stance on rising prices, which may become a bit stickier should the cost of shelter rise on a sustained basis even as the effects of the pandemic on other sectors ease in the coming months.
While we do not anticipate that this report will cause a shift in monetary policy, defending that policy just became that much more difficult.
The top-line consumer price index increased by 0.9% on the month, according to the data released by the government on Wednesday. The core metric, which excludes the more volatile food and energy components, increased by 0.4% on the month and by 4.6% on a year-ago basis.
A deeper look at the data shows that the increase took place primarily in the sectors of the economy hardest hit by the pandemic, implying some relief ahead as supply-chain bottlenecks are undone. The Fed will not be so concerned about these factors, many of which will abate in the coming months.
But the second straight 0.4% increase in owners’ equivalent rent—up by 3.1% on a year-ago basis—requires scrutiny by policymakers. The inflation that flows through this component and the broader shelter sector tends to be more persistent than the increase in the volatile food and energy components and in the pandemic-impacted industrial supply space.
This rise in shelter costs will require close attention by policymakers who will have to focus on the potential broadening out of inflation through the housing sector.
The primary policy takeaway is that the Federal Reserve will have to vigorously defend its patient outlook even as it knows the domestic fiscal boost is fading and waits to observe whether the delta variant eases on a global basis.
Our sense is that this will not alter the short-term trajectory of policy, but the Fed, through public persuasion, will need to target public expectations around pricing and the direction of policy.
The tapering operations at the Fed will come under increasing scrutiny should top-line inflation climb further along with gasoline and food prices, which are the primary catalysts behind public concerns around pricing.
The data
Energy costs rose by 4.8%, energy commodities advanced by 6.2% and gasoline costs increased by 6.1% in October. These costs were almost certainly bolstered by seasonal factors that have to do with the way the index is estimated and those increases will fade somewhat in the coming months.
For this reason, the top-line data may be somewhat exaggerated. Still, the energy component tends to strongly influence near-term inflation expectations and consumer confidence, and it will need to be addressed by policymakers immediately.
Transportation costs advanced by 2.4% on the month and were up by 18.7% from a year ago. New vehicle costs increased by 1.4%, and used cars and trucks increased by 2.55% on the month. This data, along with the seasonally impacted energy components, were the primary reasons for the rise in prices and will be subject to volatility going forward.
Service sector in check
The service sector observed a 0.6% month-over-month increase and was up by 3.6% on a year-ago basis. This data remains well behaved. Yet as the public pivots toward services demand, basis frictions will most likely send this higher in the near term.
Housing, which comprises 41.73% of the index, climbed by 0.7% on the month and by 4.5% on a year-ago basis. The policy-sensitive owners’ equivalent rent advanced by 0.4% and was up by 3.1% on a year-ago basis.
These two components have a far greater weight inside the consumer price index than the personal consumption expenditures index that the Fed uses to make policy, so it is going to be contentious area of discussion should the recent surge in rents be sustained.
Stay tuned, because this is the area of the report that presents the most significant medium- to long-term headache for policymakers.
Food and beverage prices advanced by 0.8% on the month and by 5.1% on an annual basis. Food increased by 0.9% on the month and by 5.3% from a year ago. The cost of apparel did not increase on the month and was up by 4.3% from a year ago. Medical care costs increased by 0.5% on the month and by 1.3% on a year-ago basis.
