October CPI: Sticky as Expected

The difficulty in fully quelling inflation was on display in October. Consumer prices rose 0.2% for a fourth consecutive month, driving the year-over-year change back up to 2.6%. The firm headline reading came despite another drop in gasoline prices and a more benign increase in food prices last month. After jumping 0.4% in September, grocery prices advanced 0.1%, while food away from home prices rose 0.2%. Food away from home inflation remains elevated relative to its pre-pandemic pace, but has eased considerably over the past year, having advanced 3.8%—the smallest one year change since the spring of 2021.

Excluding food and energy, the core CPI rose 0.3% (0.28% unrounded) in October. This marked the third straight monthly reading of 0.3% and represents a pick-up relative to May–July when monthly core inflation registered 0.1%-0.2% per month.

Core goods prices were flat in October, but this masks some significant movement in the sub-components. Used vehicle prices climbed 2.7%, the largest increase since May 2023 and in line with the leading signals sent by the privately-produced Manheim Index. Used vehicle prices are still down 3.4% year-over-year, but the sharp deflation seen in this sector over the past couple of years seems to be slowing down. New vehicle prices were unchanged in the month, and a big drop in apparel prices (-1.5%) helped offset the jump in used vehicle prices.

Core services prices increased 0.3% (0.35% unrounded), similar to the gains registered in September and August. Primary shelter inflation ticked up amid a 0.3% increase in rents and a 0.4% increase in owners’ equivalent rents. Despite the monthly bump higher, the year-ago pace of primary shelter inflation continues to decline and is slowly approaching its pre-pandemic pace.

Airfares rose 3.2% in October and have increased at a nearly 50% annualized rate over the past three months. These sharp gains have come on the heels of some puzzlingly weak airfare readings earlier in the year and leave the year-ago change in airfares only up 4.1%. Elsewhere, a 0.1% decline in motor vehicle insurance prices helped keep services inflation in check, as did a relatively consensus-looking 0.4% increase in medical care services prices.

Source: U.S. Department of Labor and Wells Fargo Economics

Looking through the monthly noise, inflation has gotten to a better place over the past year. The 2.6% year-over-year increase in consumer prices marks a step down from the 3.2% change this time last year and the 7.7% reading in October 2022. Core CPI also has trudged lower, moderating to a 12-month change of 3.3% compared to 4.0% last October.

Slower growth in nominal wages, a pickup in productivity growth, stable commodity prices and more price-sensitive consumers continue to slowly reduce upward pressure on prices, even as prospective fiscal/trade policy changes have renewed concerns about the path ahead for inflation.

Yet the lack of additional progress in measured inflation over the past few months points to the Fed proceeding with monetary policy easing more slowly in the near term. We continue to expect the FOMC to cut the fed funds rate by another 25 bps in December given the cumulative progress on inflation and the significant cooling in the labor market over the past year.

That said, we believe the time is soon approaching when the FOMC will slow the pace of easing further, perhaps moving to an every-other-meeting pace of rate cuts. The FOMC will receive another month’s worth of inflation and labor market data ahead of its next meeting on December 18, which likely will sway that meeting’s decision and the forward guidance for 2025.

The WSJ’s Nick Timiraos agrees:

The latest report likely wasn’t enough to derail another interest-rate cut from the Federal Reserve in December. But together with solid consumer spending and steady hiring, firmer inflation could kick off a bigger debate at officials’ next meeting over whether to slow the pace of rate cuts early next year. (…)

Investors’ positive response to the report might have been driven in part by relief that President-elect Donald Trump and the Fed won’t immediately be at loggerheads. Trump repeatedly pressed for lower rates during his first term. Economists view some of Trump’s proposed policies, such as higher tariffs, as likely to push inflation higher. (…)

My August 26 post Lucky Fed! I concluded “In all, there is no such thing as an immaculate disinflation. China’s inability to boost its domestic economy deflated imported goods and oil prices which kept inflation expectations anchored. Part of the normalization of the labor market came from surging immigration.”

China has yet to conclusively boost domestic demand and surging immigration may be a thing of the past. But low oil prices continue to bless this Fed, both on actual muted cost pressures and on inflation expectations.

• Global Oil Market Faces a Million-Barrel Glut Next Year, the IEA Says Chinese demand contracts for six straight months to September

Oil consumption in China — the powerhouse of world markets for the past two decades — has contracted for six straight months through September and will grow this year at just 10% of the rate seen in 2023, the IEA said in a monthly report on Thursday. The global glut would be even bigger if OPEC+ decides to press on with plans to revive halted production when it gathers next month, according to the agency.

It’s possible that China’s oil demand has peaked, IEA Head of Oil Industry and Markets Toril Bosoni said in an interview with Bloomberg TV on Thursday.

“It’s not just the economy and the shift, the slowdown in the construction sector,” Bosoni said. “It’s the transition to electric vehicles, high speed rail and gas in trucking that is undermining Chinese oil demand growth.”

Amid this extended weakness in Chinese demand, crude prices have retreated 11% since early October despite ongoing hostilities between Israel and Iran, as traders focus growing output in the Americas, the Paris-based IEA said. The decline foreshadows a “well-supplied market in 2025,” it added. (…)

Global oil consumption will increase by 920,000 barrels a day this year — less than half the rate seen in 2023 — to average 102.8 million per day, it said. Next year, demand will grow by 990,000 barrels a day.

“The sub-1 million barrel-a-day growth pace for both years reflects below-par global economic conditions with the post-pandemic release of pent-up demand now complete,” according to the report. “Rapid deployment of clean energy technologies is also increasingly displacing oil in transport and power generation.” (…)

While demand growth cools, supplies from producers such as the US, Brazil, Canada and Guyana is set to grow this year and next by 1.5 million barrels a day, the agency predicts. As a result, world supplies will exceed demand next year by more than 1 million barrels a day, even if the 23-nation OPEC+ cartel abandons plans to restore output. (…)

OPEC’s secretariat has belatedly recognized the demand slowdown, cutting its forecasts for this year by 18% during four consecutive monthly downgrades. Nonetheless, its projection of 1.8 million barrels a day of growth remains roughly double the rate seen by the IEA, and higher than most other market observers.

Lucky Fed, but lucky us as well. The Fed is easing amid continued strong domestic U.S. demand, risking resilient inflation. But lower oil prices might just save us all.

These charts are from John Authers’ today’s column:

Ed Yardeni:

Today’s CPI report suggests that inflation may be getting stuck north of the Fed’s 2.0% target. The headline and core CPI inflation rates rose 2.6% and 3.3% y/y during October. Goods prices are still deflating. But supercore inflation, rent inflation, and wage growth all rose last month suggesting they are getting sticky at relatively high rates. This along with strong economic growth confirms our view that the Fed has eased too much too soon. Our view is confirmed by rising bond yields, which are challenging the wisdom of the Fed’s rate cutting.

We’re not worried about a second wave of inflation because we believe that productivity is already boosting real GDP, while keeping a lid on unit labor costs inflation. Recent upward revisions in productivity confirm this view. However, we think that the Fed needs to give consumer price inflation more time to get unstuck before even considering whether any more rate cuts are necessary.

Eurozone Industry Falters Again as Trade Troubles Loom Industrial output across the 20 nations sharing the euro fell 2% in September, a sharper decline than expected

Total output decreased 2% across the 20 nations that share the euro, a sharper decline than was expected by economists, European Union data showed Thursday. Sliding 0.4% over the quarter as a whole, output marked a fresh downturn in an industrial sector that has struggled to gain a firm footing as it looks to recover from the energy shock sparked early in 2022 with Russia’s full-scale invasion of Ukraine. Compared with January 2022, just before the invasion, production has fallen 6%.

September’s sharpest fall came in production of capital goods—those used to produce other goods—which are particularly susceptible to high interest rates. (…)

Many of Europe’s industrial export sectors are struggling in the face of weak demand, including chemicals and chip makers, and several car makers and suppliers have begun planning reduced operations and layoffs.

Darker clouds are now looming on the horizon for Europe’s exporters following the election of Donald Trump to the White House in last week’s U.S. presidential vote. Trump, a protectionist, has vowed to redress his country’s trade deficit by slapping blanket tariffs on goods imported from elsewhere, including from Europe. Those tariffs could be especially steep for auto imports, Trump has suggested. (…)

Why such big surprise?

Factory output levels continued to decrease across the euro area in October. Although the rate of contraction cooled since September, it was solid and broadly in line with the average seen over the current 19-month sequence of decline. Production lines were once again squeezed by a lack of incoming new work, including from abroad*. Total new order inflows shrank at the start of the fourth quarter, although the extent of the fall was the softest since June. (S&P Global)

CONSUMER WATCH

From Bank of America Institute:

Overall, as we head into the holidays, the consumer continues to show forward momentum. Bank of America aggregated credit and debit card spending per household rose 1.0% year-over-year (YoY) in October, rebounding from a 0.9% YoY decline in September. On a seasonally adjusted basis (SA), spending fell 0.1% month-over-month (MoM), after a 0.6% MoM rise in September.

(…) by the last week of October, average card spending per household recovered in the states affected by hurricanes Helene and Milton by the last week of October, up 2% YoY after declining nearly 8% YoY during the third week of October. Meanwhile, spending growth was positive throughout the month for the rest of the United States.

When we look by category, spending on necessity goods such as gasoline has been weak over the last three months, reflecting recent deflation in this category. Additionally, spending on groceries has been modest, reflecting slowing inflation for food consumed at home.

It could be that the slowing of the pace of inflation has left more room in consumer budgets for discretionary services like restaurants, which has had three consecutive months of strengthening. This could also explain the growing contribution of discretionary services spending to overall aggregate card spending growth in the past few months. (…)

This year’s improvement in higher-income spending growth is consistent with the recovery in after-tax wage and salary growth, according to Bank of America deposit data. Meanwhile, wages are also growing steadily for lower- and middle-income peers over 2023 and 2024, although there has been some deceleration in the rate of growth at the lower end over the past year. (…)

  

• The October 2024 Survey of Consumer Expectations shows median household spending growth expectations were unchanged at 4.9%, well above pre-pandemic levels and inflation.

Small Businesses Gain Optimism in October

The NFIB Small Business Optimism Index rose 2.2 points to 93.7, tied with July for the biggest over-the-month jump this year. Most components improved over the month, the most substantial being a seven-point surge in expectations for better business conditions.

Yet, looking past the headline improvement in optimism, the underlying details suggest that small businesses are standing on shaky economic ground.

Small business sales plummeted to its weakest reading since July 2020 while labor demand continued to deteriorate. Although hurricanes Helene and Milton likely explain softer hiring in October, plans for future hiring also continued to stall, remaining essentially unchanged since May.

On the upside, inflation pressures continued to slowly ease, and the Fed’s first rate cut in September seems to already be improving borrowing conditions for small businesses. (…)

The net percent of owners with job openings rose to 35%, just a tick above September and the second lowest reading since January 2021. Hiring plans also continued to stall. A net 15% of small businesses planned to add payrolls over the next three months, essentially unchanged since May. Overall, 53% of owners reported hiring or trying to hire in October, down 6 points from September. (…)

A net 21% of firms in October reported raising their selling prices over the past three months, a one point dip from September and significantly below the 30% share in October 2023. Reports of higher prices were most frequent among firms in services industries where inflation remains the stickiest. Construction firms also reported higher prices, a product of elevated input costs and scarcer labor supply.

(…) small business owners appear more optimistic about future demand than current conditions seem to warrant. The net percent of firms expecting higher real sales jumped five points to -4%, accompanied by a similar, albeit smaller bump in earnings expectations. Yet, reports of actual sales deteriorated to its weakest reading since July 2020 (-20%).

• The Fed’s Senior Loan Officer Opinion Survey was also released today. It showed that commercial banks are more willing to lend. Credit conditions have eased significantly, reducing the risk of a credit crunch and a recession. That’s bullish for earnings and for valuations. Under the circumstances, it’s not clear why the Fed is committed to more cuts in the federal funds rate. (Ed Yardeni)

OPEC Cuts Global Oil Demand Growth Forecasts For a Fourth Consecutive Month Group’s estimate of 2024 oil consumption down 18% since July

Global oil consumption will increase by 1.8 million barrels a day — just under 2% — in 2024, the Organization of Petroleum Exporting Countries in a monthly report. That’s 107,000 barrels a day less than previously forecast after data from across Asian nations like China and India, as well Africa, arrived below expectations, it said.

OPEC has scaled back this year’s demand growth projections by almost a fifth since July, in keeping with a sharp retreat in crude prices. Yet the cartel’s outlook remains significantly more bullish than other forecasters — from Wall Street banks and trading houses, and even Saudi Arabia’s oil company, Aramco. It’s roughly double the rate anticipated by the International Energy Agency. (…)

OPEC predicts that world oil consumption will average 104 million barrels a day this year. Daily demand will increase by a further 1.5 million barrels in 2025, or 103,000 barrels less than the organization previously forecast.

OPEC’s rival institution, the Paris-based IEA, will release its latest monthly assessment of global oil markets on Thursday. It has predicted that demand growth will slow as the world shifts away from fossil fuels toward electric vehicles, in a bid to avert disastrous climate change.

Private-Credit Boom Has Echoes of Subprime, Warns Senior Central Banker

The rapid rise of private credit poses a threat to financial stability, and banks don’t even know the extent of their exposure to the growing asset class, warned a senior European central banker.

An estimated $2 trillion has poured into private credit, a loose term for loans and other financing provided to companies by nonbank lenders such as insurers and funds.

The loans usually are to riskier borrowers, companies that typically don’t have credit ratings or file public financial reports. The main appeal for investors is higher yields, and not having to register market-price fluctuations in their portfolios.

“It’s entirely appropriate to be much more insistent on detailed visibility so systemic financial instability is not the result and so that individual bank failures are not the result,” said Elizabeth McCaul, a European Central Bank supervisory board member.

In an interview before her five-year ECB term ends this month, McCaul said the central bank recently found that lenders couldn’t identify their overall exposure from financing they extend to private credit funds. They also don’t always know when companies they lend to are additionally receiving private credit.

She said there has to be more reporting and transparency to address the red flags she and other authorities see around leverage, opacity and valuation.

“I worry about an amplification of the positions that banks hold, whether those be market positions or credit positions, where there are duplications of positions that aren’t visible,” McCaul said.

She said she is also concerned about how private-credit providers, many of which haven’t been through a downturn, make lending decisions and use “mark-to-model” techniques to value companies.

McCaul, who earlier was New York Superintendent of Banks and held senior roles at Promontory Financial, said she saw similarities with 1998’s Long Term Capital Management blowup and the subprime-mortgage lending that fueled the 2008 financial crisis.

These incidents and 2021’s Archegos family-office default show how banks can suffer big losses when they don’t have a full picture of the risks. They also all highlighted gaps in regulation, McCaul said.

She said a former boss liked to quote: “There is no education in the second kick of a mule.”