• Price pressures show signs of cooling

• Headline CPI slowed to 7.7% YoY

• Core measure (ex food and energy) gained 0.3% MoM, 6.3% YoY

• October’s inflation report leaves the Fed on track for 50bps rate hike in  December

The US Consumer Price Index (CPI) showed that inflation cooled more than  expected in October, welcome news for the Federal Reserve after months of  limited progress on bringing down inflation. Sky-high inflation has caused the Fed  to raise rates aggressively this year, a process that has boosted the USD and caused  US Treasuries and shares around the world to sell off sharply.

While inflation is still rapid, it slowed notably last month. Consumer prices picked  up by 7.7% YoY, the smallest since January and down from September’s 8.2% YoY.  Inflation had peaked at a nearly 41-year high of 9.1% YoY in June. On a monthly  basis, price gains climbed by 0.4% between September and October, matching the  previous month. The surprise was driven by softer-than-expected core CPI. Core  prices, which exclude food and energy and are regarded as a better underlying indicator of inflation, advanced 6.3% YoY, pulling back from a 40-year high of 6.7% in the prior month. The core consumer price index increased 0.3% MoM.

The underlying details of the report were also encouraging. Energy prices increased  by 1.8% MoM, reversing some of the declines of the prior four months, and  remains a wild card heading into winter. Gasoline prices were higher by 4.0%  MoM, while energy services declined by 1.2% MoM. Energy has been a mixed bag,  with gasoline prices having declined in recent months but electricity and natural  gas still rising at a whopping pace. As weather turns cold, the cost of heating homes  will further strain household budgets. Food prices rose 0.6% MoM, following the  0.8% MoM gain in September, and are up 10.9% YoY. Disinflation is becoming more  widespread in goods sectors, suggesting that firms might by offering discounts to  liquidate excess inventory. Household furnishings, apparel, cars, and electronics  items all saw a substantial drop in inflation. Smartphone prices for example are  down 23% YoY, the biggest price decline of any item included in the CPI. Tickets to  sporting games saw the second biggest decline from last year, down 18%.

Services inflation also moderated. Price growth across core services (0.5% MoM)  moderated from last month’s gain of 0.8% MoM. Shelter costs (0.8% MoM) were  again a meaningful contributor. The good news is that the monthly gains in rent of  primary residence and owners’ equivalent rent of residence both slowed, after  several months marching higher. Other service categories including transportation  (0.8% MoM), recreational (0.68% MoM) and education & communication services  (0.1% MoM) also rose on the month, while price growth across medical services (- 0.6% MoM) were lower.

Core goods prices declined 0.4% MoM after recording a flat reading the month  prior. Declines were seen across used vehicle prices (-2.4% MoM) and apparel (- 0.7% MoM). Recreational goods (0.7% MoM) and new vehicle prices (0.4% MoM)  were higher, while medical care goods were flat.

October’s inflation report leaves the Fed on track for 50bps rate hike in December

It’s been a while since CPI has surprised to the downside. October’s inflation bucked the trend, with the year-over-year reading of headline inflation easing to a pace not seen since  the beginning of the year. The pullback in core goods prices was perhaps the most encouraging development, as it would appear that softening consumer demand is finally  manifesting in some disinflationary pressure. The soft October core CPI print offers Fed doves  a powerful justification to slow the pace of rate hikes going forward.

The declines in the CPI are small that consumers may not feel much relief in day-to-day life,  but in the overall inflation fight, the declines might signal that at least the worst is over. If  data in the weeks ahead confirm prices are stabilizing and the economy – particularly the  resilient labor market – is cooling, the Federal Reserve's plan to slow the pace of rate  hikes could come as early as December. The October inflation report could keep the Fed on  track to approve a half-percentage-point interest-rate increase next month, even as they  pencil in slightly higher rates next year than they had anticipated previously. But the Fed's  job is far from over. Inflation remains far from the Fed's 2% goal, which means Americans  should prepare for the Fed to keep raising its short-term benchmark fed funds rate into next  year. With inflation still a long way from target and the labor market historically tight, it is  entirely possible that the fed funds rate reaches 5% by mid-2023.

Source: BIMB Securities Research - 11 Nov 2022