Further evidence of disinflation and the return of price stability are the primary takeaways from the inflation data released on Thursday as the consumer price index increased by 0.2% in September and by 2.4% on a year-ago basis.
The U.S. consumer price index increased by 0.2% in September and by 2.4% on a year-ago basis.
The primary catalysts for the modest increase in top-line inflation were the 1.9% drop in energy prices and the 4.1% decline in gasoline prices.
The three-month average pace of inflation is now sitting at a comfortable 2.4%, reflecting the best inflation outlook in the economy over the past three years.
Just as encouraging was the easing in the index’s housing components. Housing and shelter rose by 0.2% and the policy-sensitive owners’ equivalent rent series increased by 0.3%.
As the lag in rents begins to show up in the index—we know from real-time data that rents had been falling for some time—this easing will put further downward pressure on top-line inflation and set the stage for further rate cuts by the Federal Reserve.
Core inflation excluding the volatile food and energy components increased by 0.3%, primarily because of sustained stickiness in service-sector pricing, which increased by 0.4% on the month.
Also contributing was a 1.1% increase in apparel, a 0.2% increase in new vehicles, a 0.3% rise in used autos, a 3.2% gain in airline fares and a 0.4% advance in medical care costs.
On a year-ago basis, core inflation was up by 3.3%. Food prices increased by 0.4% while shelter and food costs combined for more than 75% of the total increase in inflation on the month.
Looking ahead
Hurricanes Helene and Milton will distort fourth-quarter growth, inflation and employment data.
At this point, the October jobs report will most likely show flat or negative growth in total employment and an increase in unemployment, to the point where we are not likely to get clean looks at the major economic data series until later this year or early next year.
The sharp increase in jobless claims on Thursday was linked to hurricane-related distortions and was the tip of the spear with respect to the distortions to critical economic data that these natural disasters will have in the near term.
Snarled transportation and supply chains from both storms, as well as volatility in global oil prices, will temporarily send top-line inflation higher in the October and November.
Policy implications
The Federal Reserve is quite aware of such distortions and tends to look through the temporary impact of natural disasters and price volatility in oil markets.
In addition, past evidence from natural disasters will create a drag on economic activity in the near term and then bolster activity once reconstruction begins.
While we are aware that destruction of sunk costs and insurance-inspired rebuilding does not represent so-called real growth, it will affect gross domestic product calculations, estimates of total employment and inflation aggregates over the next three to six months.
We are confident that neither the September inflation data nor the natural disasters will disrupt monetary policy. The Federal Reserve remains on a path to cut its policy rate by 25 basis points next month and will most likely do so again in December.
The takeaway
Disinflation continues to be the primary narrative emerging from American inflation data. With the consumer price index rising at a 2.4% rate and the personal consumption expenditures index rising by 2.3%, it is appropriate for the Fed to relax its restrictive policy rate through the remainder of the year.
Price stability has been re-established and policymakers are keen to get the federal funds policy rate back to neutral, which the Fed currently implies stands at 2.9%.
Read more of RSM’s insights on the economy and the middle market.
But in the near term, oil price volatility and the recent natural disasters will temporarily distort inflation readings. These distortions will add to the uncertainty over the path of growth, employment and inflation.
We expect the Fed to keep its eyes on preserving full employment amid general price stability, which points to a further reduction in interest rates this year.
