If one was looking for evidence of a soft landing and a sustained economic expansion, look no further than the October consumer price index.
The October CPI report strongly implies a soft landing for the American economy.
Disinflation inside the October consumer price index caused by falling commodity, oil and gasoline prices resulted in no increase in inflation on the month and an easing in the year-over-year aggregate to 3.2%.
More important, key services like transportation and airfares experienced outright declines on the month, which facilitated a 0.2% increase in core inflation on the month and 4% on a year-ago basis.
Sustained improvement in the overall inflation outlook underscores our view that the Federal Reserve will remain on pause at its December policy meeting and should be done hiking rates as the economic expansion continues.
From a policy perspective, the key components inside the monthly CPI report, released by the Bureau of Labor Statistics on Tuesday, revolves around the estimate of so-called super-core inflation, which increased by 0.2% on the month and 3.7% on a year-ago basis. Those increases imply further relief across the real economy around wage pressures.
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In addition, the pace of service sector inflation, which comprises 61.76% of the overall index, increased by 0.3%, and the pace of inflation in shelter, which makes up 34.86% of the index, increased by 0.3%, or half of the 0.6% posted in September.
The three-month run rate on both services and shelter has eased to just over 4%, which should buttress the argument of those at the Federal Reserve to remain on hold as the economy, hiring and inflation cool into the end of the year.
Policy implications
The Federal Reserve is poised to keep rates steady at its December meeting as it attempts to set policy conditions that support a continuation of the economic expansion.
But refraining from any rate hike will not alter the Fed’s tightening bias in the December statement, nor will it change its rhetoric around lifting rates if inflation were to prove far more stubborn or unexpectedly reaccelerate.
While our forecast for the consumer price index for next year implies a decline to 2.5% in the top-line figure by the end of the year, it will be some time—we think June—before the Fed is comfortable altering that policy stance and will cut rates.
The data
Beneath that encouraging and top-line data, inflation excluding food costs had no increase in October and was up by 3.2% from one year ago.
Excluding energy, inflation increased by 0.2% monthly and was up by 3.9% on an annual basis. If one excludes, food, energy and shelter, inflation increased by 0.1% and 2%, respectively. What that means is that 44.5% of the total index is now advancing at a 2% annual pace, which underscores our call for the Fed to end its rate hike campaign.
Energy costs declined by 2.5% on the month, while energy commodities fell by 4.9% and gasoline by 5%. Overall commodity prices declined by 0.4% and were up by a paltry 0.4% on a year-ago basis.
Housing costs increased by 0.3% monthly and were up by 5.2% from one year ago, while shelter costs advanced by 0.3% and 6.7%. The policy-sensitive owners’ equivalent rent series increased by 0.4% monthly and by 6.8% over the past year.
Because of the way the Labor Department measures housing costs, there is a substantial lag between high frequency data and the official data—which indicates substantial easing in inflation pressures.
Forward-looking policy makers, investors and chief executive officers should anticipate further declines in the top-line, core and super-core inflation readings. These declines will ease pressures around top-line operating and wage costs. This is encouraging and constructive news for business conditions in the real economy and for small- and medium-size firms that face elevated borrowing costs to finance business expansion.
Food and beverage costs increased by 0.3% on the month, apparel increased by 0.1%, while the cost of new vehicles declined by 0.1% and used cars and trucks fell by 0.8%.
Recreation costs advanced by 0.1% monthly, education and communications prices declined by 0.2% and medical care costs advanced by 0.3%.
The takeaway
Further evidence of disinflation was on display inside the October consumer price index, and we expect that to be the primary narrative in the November and December inflation reports.
Top-line inflation has declined from a peak of 9.1% in June 2022, and from 6.4% at the beginning of the year. Such a decline should provide enough policy space to permit the Federal Reserve to remain on hold at its December policy meeting.
Just as important, real average hourly earnings increased by 0.8% on a year-ago basis. We anticipate that as wages continue to increase above inflation and pricing pressures ease, real disposable personal income will increase. Those gains will put a floor under an economy adjusting to higher costs of doing business and financing durable goods.
The October CPI report strongly implies a continuation of the current economic expansion and a soft landing for the American economy.
