In many ways, the U.S. September consumer price index report is the perfect depiction of the K-shaped economy.
The data gives cover to the Federal Reserve to cut rates on Oct. 29 and in December as inflation eased a bit on a monthly basis, to 0.3%, and ticked up on an annual basis, to 3%.
That is a good development.
Those who work and live in a world of low rates, liquidity and leverage will continue to prosper from the more dynamic portions of the American economy as rate cuts bolster equity prices, dampen yields and push firms back toward risk-on behavior, which should boost the pace of hiring.
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Upper-income households bolstered by rising incomes and ever-increasing equity valuations and home prices can plan out their portfolio allocations and capitalize on current economic conditions.
The upper spur of the Big K is a good place to be.
But those who live and work on the lower spur of K may have a vastly different view of the economy.
Look beneath the headline number and there are large annual increases in the cost of food, meat, housing and utilities. Middle class and down-market households experiencing slowing wage growth are having difficulty adjusting to persisting increases in the cost of living.
For those households, it is about food, fuel and utilities.
It’s only natural that those who inhibit the lower spur of the K ask: What is it that those celebrating a more modest increase in the pace of price increases see that indicates inflation is not eroding my standard of living?
We will get our rate cuts this year. The Fed will slowly push its policy rate toward its estimate of the neutral rate at 3% over the next year. But with inflation likely to reside at or above 3%, it’s going to be increasingly difficult to reconcile the world of the upper and lower spur of the Big K.
The data
Inflation slowed to a tolerable 0.3% monthly increase in September and the core excluding food and energy advanced at a 0.2% pace. On a year-ago basis, inflation increased by 3% in both the top line and the core, which is well above the Fed’s 2% target.
Energy costs advanced by 1.5% on the month because of a 3.8% rise in energy commodities and a 4.1% increase in gasoline.
Recent geopolitical tensions and sanctions placed on Russian oil firms will create conditions for further volatility across global oil and energy markets.
The key inflation driver continues to be the service sector, where prices increased by 0.2% on the month and by 3.6% on a year-ago basis. Excluding energy, those prices rose by 3.5% annually.
Housing costs increased by 3.9% annually and shelter rose by 3.6%. Fuels and utilities increased by 5.8% while food and beverages advanced by 3% over the past 12 months. Electricity costs rose by 5.1% and utility gas services by 11.7%.
It is in the food complex where one can most clearly observe cost-of-living stress, with food prices rising by 3.1% from a year ago—which partly explains the sour mood among down-market households.
The cost of beef and veal rose by 14.7% from a year ago, fresh vegetables by 2.8%, coffee—which is purely tariff induced—by 18.9%, sugar and sweets by 6.7%, and food away from home by 3.7%.
Going forward
The September CPI will be the last solid quality inflation report until early next year.
Because of the government shutdown, which we think will run into November, there will be insufficient time to collect enough data to put together the October report that is scheduled to be published on Nov. 13.
For this reason, the Bureau of Labor Statistics will be making educated guesses on pricing, which will cause many to question the data until the BLS can have the two to three months to catch up following the shutdown.
The takeaway
The pace of inflation moderated sufficiently to provide cover for the Federal Reserve to cut rates by 25 basis points at its meeting on Oct. 29 and in December.
But the economy appears to be settling into a pace of inflation that exceeds 3%.
It’s a searing example of the bifurcation in an economy where those who have exposure to the more dynamic elements of the economy thrive while those who work in areas like housing, agriculture and extractive industries are bearing the burden of adjustment to persistent inflation.
