• US core CPI was another hot one…
  • ...with still very high breadth
  •  Markets reacted by driving a stronger dollar, higher rates and lower equities…
  • ...and a 5% Fed funds terminal rate
 
  • US CPI m/m % // y/y %, September:
  • Actual: 0.4 / 8.2
  • Scotia: 0.1 / 8.0
  • Consensus: 0.2 / 8.1
  • Prior: 0.1 / 8.3
  • US core CPI m/m % // y/y %, September:
  • Actual: 0.6 / 6.6
  • Scotia: 0.5 / 6.6
  • Consensus: 0.4 / 6.5
  • Prior: 0.6 / 6.3

That US core inflation soared is becoming an all-too-familiar observation, yet it did it again in September by landing higher than consensus and a touch higher than my above-consensus estimate. There is nothing here that says core inflation and its breadth is softening or leaning toward a Fed pivot.

Core CPI was up by 7% m/m at a seasonally adjusted and annualized rate (0.5% m/m SA non-annualized). The trend remains very hot as shown in chart 1 and has been hot dating right back to April 2021 with a few soft patches along the way. You can’t cherry pick your favourite numbers along this path as the trend has been too hot for too long. The latest soft patch in July is now a proven head fake as core CPI sharply accelerated in the three months leading up to it and the two months since then.

Chart 1: US Core CPI

Furthermore, breadth remains very high (chart 2). On a y/y basis, 91% of the CPI basket is up by over 2% y/y, 81% is up by over 3%, 72% over 4% and 63% over 5%. There are extremely widespread price pressures in the US economy and there isn’t any evidence that the breadth of the pressures is cooling.

Chart 2: US Inflation Showing High Breadth

Markets reacted by pushing the two-year Treasury yield up by about 20bps, the USD about ½% firmer on a DXY basis and the S&P about 1% lower so far. Fed funds futures are pricing a few basis points more than a 75bps hike on November 2nd, a 4½% upper limit by December and a terminal rate at 5% in Q1 which I think generally makes sense with information at hand to date. In other words, about another 1¾ percentage points of rate hikes are pricing by Q1 from 3¼% now. I think the FOMC would be open to this path. The rate path has been pushed into uncharted waters with the Fed likely more determined to crush inflation’s back with whatever pain is necessary.

DETAILS

Charts 3 and 4 show the unweighted m/m changes in prices across CPI components and the weighted contributions to the overall m/m change in CPI respectively. Charts 5 and 6 do likewise in year-over-year terms. Please also see the accompanying collection of charts providing further breakdowns.

Chart 3: September Changes in US Headline CPI Categories; Chart 4: September Weighted Contributions to Monthly Change in US Headline CPI
Chart 5: September 12-Month Changes in US Headline CPI Categories; Chart 6: September Weighted Contributions to the 12-Month Change in US Headline CPI
Chart 7: US Core PCE & CPI; Chart 8: US Goods vs Services Inflation; Chart 9: Homebuying Price Surges Causing Upward Pressure on Rents; Chart 10: New vs Used Vehicle Inflation
Chart 11: US Motor Vehicle Insurance; Chart 12: US Food Prices; Chart 13: US Airfare; Chart 14:  US Apparel
Chart 15: US Health Insurance; Chart 16: US Medical Care Insurance Inflation; Chart 17: US Smartphones; Chart 18: US Cell Phone Service Inflation

Across components, food prices were up 0.8% m/m with both at home (0.7%) and away from home food prices (0.9%) were up strongly. The food at school category was up by 44.9% m/m but maybe ask students if the quality has gone up with it… bwah!

Gasoline prices were a drag as expected as they fell by -4.9% m/m.

Owners equivalent rent was up by 0.8% m/m and won't turn for a while longer and only after a string of declines in repeat sale home prices.

Used vehicle prices were down 1.1% m/m in line with expectations but I'm surprised that new vehicles were up 0.7% m/m.

Across pandemic affected categories, vehicle rentals were up by 2.5% m/m, airfare was up 0.8% m/m, and lodging was down 1%.

Overall services ex-energy prices were up by 0.8% which continues to escalate.

I'm also surprised that piped gas was up 2.9% m/m unweighted. July's drop in natural gas flowed through to CPI, this time the drop in September didn't. Regulatory delays and differences in plans, but I would expect October to be a drag in this category although there is only a small 1% weight on this category.

We are seeing disinflation in the clothing categories since some of the inventory burn began at some retailers switching between seasons on overstocked clothing items. Apparel down 0.3% m/m and soft for the past three months. Men's clothing leading the declines. Same with footwear.

Smartphone prices were down 2.9% m/m in September and are down by 21% y/y. Funny, I didn’t think they had become some combination of that much cheaper and that much better as I’ll stick with my existing one.

There is also some evidence that folks are returning more and more to services they may have held off on. Dental service prices were up 0.5% m/m after a gain of 1.7% the prior month. Eyeglasses and eye care up 3.2% m/m. Physicians' services up 0.5% m/m.

Auto insurance is still soaring with ongoing >1% m/m increases as insurers may be making up for tough markets.

Health insurance is also continuing to soar with a string of >2% m/m increases. Home insurance is relatively tame.

 Please also see the accompanying table that provides further detail along with micro trend charts and z-score measures of price changes compared to recent multi-year norms.

Regular publishing will resume on Monday.

Table: US Inflation Component Breakdown
Table: US Inflation Component Breakdown
Table: US Inflation Component Breakdown