U.S. Consumer Price Index (October 2023)

Lower prices at the pump cool headline inflation, and cooler core inflation provides reassurance

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• The Consumer Price Index (CPI) was flat in October, marking a deceleration from September's 0.4% month-on-month (m/m) gain, and below consensus expectations. On a twelve-month basis, headline inflation cooled further to 3.2%.

• Energy prices helped hold back headline inflation, dropping 2.5% m/m, driven by a drop in gasoline prices (-5.3% m/m). Food prices added upward pressure to inflation on a monthly basis (+0.3% m/m), but at 3.3% year-on-year, are no longer providing the lift to headline inflation they were last year.

• There was good news on core inflation, which rose 0.2% m/m, below market consensus. Core inflation was up 4% on a year-on-year basis in October, down a tick from September.

• Core goods prices have been a downward force on inflation for five months now, with prices down 0.1% m/m in October. Even services price gains cooled, up 0.3% m/m after a string of hotter readings over the past few months.

• Shelter costs have been a key factor pushing service costs higher, and rose a more modest 0.3% m/m in October. Shelter inflation eased on both a 2.5% m/m drop in lodging away from home, and a cooling in owners' equivalent rent (rising by 0.4% m/m from 0.6% m/m in September).

  • Non-housing services (aka the CPI measure of 'supercore') also decelerated in October, rising 0.3% m/m (from 0.6% m/m in September). However, hotter readings in recent months have left the twelve-month pace unchanged at 3.7%.

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• Well that is more like it. October's CPI inflation report showed encouraging progress towards the Fed's 2% target. Core inflation is still well above a pace consistent with the Fed's target, so it remains way too early for the Fed to declare victory, but policymakers likely just exhaled a bit. On a three-month annualized basis core inflation was 3.4% in October – still too high but pointing to further deceleration ahead.

• The challenge for the Fed is much of the low hanging fruit on dis-inflation has been picked. Resolution of supply chain snarls that were keeping prices elevated, and other pandemic re-opening pain points, have already exerted a downward influence on inflation, and now we need to see consistently softer prices pressures due to weaker demand to get back to target. So far, consumer demand has kept up, but we will be watching tomorrow's retail sales figures for October closely for signs of fatigue. If we don't start to see greater cooling, the Fed will likely need to raise rates again.