The October CPI report strongly implies a soft landing for the American economy.
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%.
