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)
