- Core CPI landed on the screws at 0.3…
- ...but pandemic-era seasonal adjustments are overstating core inflation…
- ...lending more support toward the Fed cutting next week
- US CPI, m/m % change, November, SA:
- Actual: 0.3 / 0.3
- Scotia: 0.3 / 0.3
- Consensus: 0.3 / 0.3
- Prior: 0.2 / 0.3
US core CPI inflation landed on the screws, was likely weaker than reported if not for ongoing distortions to seasonal adjustment factors, but all summed up reinforces expectations for a quarter point cut from the Fed one week from today.
Headline and core CPI inflation was 0.31% m/m in November, matching Scotia’s estimate and the median consensus estimate while higher than the minority of forecasters expected. It has landed at this rate for four months in a row (chart 1).
Before turning to details we need to consider the role of seasonal adjustment factors. Core CPI was likely lower than stated if not for an ongoing bias in the SA factors. It's no coincidence that the five biggest SA factors for core CPI have all been in the pandemic era (chart 2). SA factors are calculated with a recency bias that is slanted toward recent years. They always have been and there are lots of papers about this online that predate the pandemic. But it's more problematic when the recent period covers wild shutdowns and reopenings that throw all the SA factors into a period of turmoil.
This issue matters a lot. At any of the pre-pandemic SA factors, November’s core CPI would have been between 0% m/m and 0.2 with generous rounding up (chart 3). In plain English, SA factors are distorting core inflation to be too high of late.
The problem is that the Fed can't have its cake and eat it too. Powell can't turn more dovish and cut 50 in September when SA factors were underestimating inflation over the summer and then be dovish when SA factors are overestimating it. Powell in July had it right when he said you need to smooth the figures. Powell since then has gotten it wrong imo. SA factor issues overstated inflation at the start of the year, understate is in the summer months and then overstate it again.
Across components, shelter is showing some improvement. It was up 0.3% m/m SA, but primary rent was up by just 0.2 and so was owners’ equivalent rent. Maybe the Fed's long awaited disinflation from housing as market rents push through the inflation figures is finally coming to fruition.
But what Powell also once emphasized is that this housing disinflation story may be offset by core services stickiness. Core service prices (ex-housing and energy services) were up 4.2% m/m SAAR last month and remain sticky at elevated levels.
Among other components, gas prices were up by 0.6% m/m SA, core goods prices were up 0.3%, food away from home was up by 0.3% which is still warm, groceries (aka food at home) were up 0.4% which is hotter, and clothing prices were unspectacular at 0.2%.
Based on CPI components I would tentatively lean toward 0.2 for core PCE pending PPI that we get tomorrow. We won’t get PCE figures until next Friday, two days after the FOMC, but they’ll have a good idea of the number ahead of time through their own estimates.
More charts are available on the following pages. Also please see the detailed table showing components, other measures, and charts.
DISCLAIMER
This report has been prepared by Scotiabank Economics as a resource for the clients of Scotiabank. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither Scotiabank nor any of its officers, directors, partners, employees or affiliates accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents.
These reports are provided to you for informational purposes only. This report is not, and is not constructed as, an offer to sell or solicitation of any offer to buy any financial instrument, nor shall this report be construed as an opinion as to whether you should enter into any swap or trading strategy involving a swap or any other transaction. The information contained in this report is not intended to be, and does not constitute, a recommendation of a swap or trading strategy involving a swap within the meaning of U.S. Commodity Futures Trading Commission Regulation 23.434 and Appendix A thereto. This material is not intended to be individually tailored to your needs or characteristics and should not be viewed as a “call to action” or suggestion that you enter into a swap or trading strategy involving a swap or any other transaction. Scotiabank may engage in transactions in a manner inconsistent with the views discussed this report and may have positions, or be in the process of acquiring or disposing of positions, referred to in this report.
Scotiabank, its affiliates and any of their respective officers, directors and employees may from time to time take positions in currencies, act as managers, co-managers or underwriters of a public offering or act as principals or agents, deal in, own or act as market makers or advisors, brokers or commercial and/or investment bankers in relation to securities or related derivatives. As a result of these actions, Scotiabank may receive remuneration. All Scotiabank products and services are subject to the terms of applicable agreements and local regulations. Officers, directors and employees of Scotiabank and its affiliates may serve as directors of corporations.
Any securities discussed in this report may not be suitable for all investors. Scotiabank recommends that investors independently evaluate any issuer and security discussed in this report, and consult with any advisors they deem necessary prior to making any investment.
This report and all information, opinions and conclusions contained in it are protected by copyright. This information may not be reproduced without the prior express written consent of Scotiabank.
™ Trademark of The Bank of Nova Scotia. Used under license, where applicable.
Scotiabank, together with “Global Banking and Markets”, is a marketing name for the global corporate and investment banking and capital markets businesses of The Bank of Nova Scotia and certain of its affiliates in the countries where they operate, including; Scotiabank Europe plc; Scotiabank (Ireland) Designated Activity Company; Scotiabank Inverlat S.A., Institución de Banca Múltiple, Grupo Financiero Scotiabank Inverlat, Scotia Inverlat Casa de Bolsa, S.A. de C.V., Grupo Financiero Scotiabank Inverlat, Scotia Inverlat Derivados S.A. de C.V. – all members of the Scotiabank group and authorized users of the Scotiabank mark. The Bank of Nova Scotia is incorporated in Canada with limited liability and is authorised and regulated by the Office of the Superintendent of Financial Institutions Canada. The Bank of Nova Scotia is authorized by the UK Prudential Regulation Authority and is subject to regulation by the UK Financial Conduct Authority and limited regulation by the UK Prudential Regulation Authority. Details about the extent of The Bank of Nova Scotia's regulation by the UK Prudential Regulation Authority are available from us on request. Scotiabank Europe plc is authorized by the UK Prudential Regulation Authority and regulated by the UK Financial Conduct Authority and the UK Prudential Regulation Authority.
Scotiabank Inverlat, S.A., Scotia Inverlat Casa de Bolsa, S.A. de C.V, Grupo Financiero Scotiabank Inverlat, and Scotia Inverlat Derivados, S.A. de C.V., are each authorized and regulated by the Mexican financial authorities.
Not all products and services are offered in all jurisdictions. Services described are available in jurisdictions where permitted by law.