- Core CPI inflation is rebounding from the soft patch
- Powell’s favourite services measure is on fire again
- Details suggest broad underlying inflationary pressures
- Core CPI, nonfarm and GDP tracking…
- ...keep a Fed tightening bias very much intact
- US CPI / core CPI, m/m % SA, September:
- Actual: 0.4 / 0.3
- Scotia: 0.3 / 0.3
- Consensus: 0.3 / 0.3
- Prior: 0.6 / 0.3
The rebound in underlying inflationary pressures within the US economy is proving that the brief summertime soft patch was a fourth pandemic-era head fake. It’s not that core inflation is running way off the charts again, but the brief undershooting period has given way to a renewed patch of overly hot readings.
Markets reacted by driving higher yields across the Treasury curve while retaining a mild bear flattener on the day. The two-year Treasury yield jumped by about 6bps and the 10s yield increased 8bps post data. The dollar firmed and equities lost earlier momentum.
Fed funds futures drove December contract pricing up by about 4bps to roughly 50–50 odds of a hike by then. I think pricing for November 1st should be higher than near-zero odds of a hike and will return to that later. BoC pricing also edged upward post-data.
The 0.32% m/m SA rise in CPI excluding food and energy matched the median consensus estimate and mine and was a tick above the next most frequent estimate within consensus.
At an annualized rate, core inflation was 3.9% m/m SAAR in September. Given that the prior month was up 3.4% m/m SAAR, the brief summertime soft patch through a pair of 1.9% m/m SAAR readings in June and July looks to have been an aberration (chart 1). Core inflation is still running cooler than the ~5% m/m SAAR pace coming out of Winter into early Summer, but restoring the trajectory toward the upper 3s won't satisfy the FOMC that inflationary pressures are abating fast enough toward their 2% headline PCE target.
Chart 2 shows that the summertime soft patch is modestly giving way to renewed acceleration. The devil lies in the details.
DETAILS
Key is that core services inflation is accelerating again. It was up by 0.6% m/m SA CPI on a CPI core services ex-housing and ex-energy services basis. That is the hottest reading since a year ago and equates to 7.6% m/m SAAR (chart 3).
Such a hot core services inflation reading matters because it goes back to the measure Powell said they would be watching very closely in terms of core PCE. The guidance from this measure in cpi suggests that underlying pressures on service sector pricing remain too warm for their liking after an earlier soft period.
Core goods CPI inflation, however, continues to ebb, albeit we'll need to closely monitor the holiday shopping season that's around the corner with US Thanksgiving, Black Friday and Cyber Monday all ahead next month (chart 4).
Housing accelerated pretty sharply. Housing's 44.5% weight saw it jump by 0.6% m/m SA, double the prior month. Shelter costs were up by 0.6%, also double the prior month. Owners’ equivalent rent climbed by 0.6% m/m from 0.4% prior (chart 5) while rent of primary residence has rebounded over the past couple of months (chart 6).
Select other measures are shown in charts 7–11. Charts 12–13 break down the basket in m/m unweighted and weighted contribution terms. Charts 14–15 do likewise in y/y terms.
Used vehicles shaved about -0.1% m/m off of core CPI in weighted contribution terms. New vehicles contributed nothing in either direction.
Gas was an upside driver of headline inflation with a rise of 2.1% m/m SA and a 3.6% weight such that it added 0.1% m/m SA in weighted contribution terms.
Apparel prices were down by 0.8% m/m but this was insignificant in weighted terms.
Please also see the accompanying detailed table including micro charts and z-score measures of deviation from historical trends.
FOMC IMPLICATIONS
Overall, I think the FOMC would look at this and still conclude that underlying inflationary pressures remain too hot for their liking. Core CPI is bouncing back and more important is the evidence on underlying service prices. With readings and underlying details like these and after nonfarm payrolls surprised sharply higher alongside yet another quarter of strong GDP tracking, I would be tilting the balance toward a November 1st hike more favourably than what is still light market pricing.
We’ll see what Fed speakers have to say about it later today with Logan (10amET), Bostic (1pmET) and Collins (4pmET) on tap. Chair Powell speaks before the Econ Club of NY next Thursday just before the FOMC goes into communications blackout next weekend.
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