• Consumer prices rose 0.4% MoM and was up 3.7% YoY

• Core CPI rose a subdued 0.3% MoM and 4.1% YoY

• Core services accelerated higher

• Core goods prices remained in deflationary territory

• Mild CPI reading likely keep

Price increases remained elevated in September as year-high gas prices and shelter costs kept inflation high and heaped more pressure on consumers.

Inflation in the United States rose at a 0.4% MoM pace in September, marking a deceleration from August’s 0.6% MoM gain. On a year-on-year basis, headline inflation held steady at 3.7%. The index for shelter was the largest contributor to the monthly increase, accounting for over half of the increase. An increase in the gasoline index was also a major contributor to the monthly rise. While the major energy component indexes were mixed in September, the energy prices rose 1.5% MoM, largely driven by a further increase in gasoline prices (+2.1% MoM) while the price for electricity rose 1.3% MoM. Despite the September monthly increases, the energy prices fell 0.5% YoY, with its components mixed. The natural gas price fell 19.9%, and the fuel oil price fell 5.1% over the span. The gasoline price increased 3.0% YoY, while the price for electricity rose 2.6% YoY. Food prices rose 0.2% MoM – matching August’s monthly gain – as prices for ‘food away from home’ accelerated to 0.4% from 0.3%, while prices for ‘food at home’ slowed 0.1% from 0.2%.

However, excluding volatile food and energy, core inflation rose 0.3% MoM – matching August’s gain. The annual change continued to edge lower – falling 0.2 percentage points to 4.1% – though the truncated three-month annualized change rose to 3.1% from 2.4% in August. The shelter index was the largest factor in the monthly increase in the core inflation. The shelter index increased 0.6% MoM in September, after rising 0.3% the previous month. The index for rent rose 0.5%, and the index for owners’ equivalent rent increased 0.6%. The lodging away from home index increased 3.7 % MoM, ending a string of 3 consecutive monthly decreases. The shelter index increased 7.2% YoY, accounting for over 70% of the total increase in all items less food and energy.

Price growth across services accelerated 0.6% MoM from 0.4% MoM in August, which was the strongest monthly gain since February 2023. Shelter costs were a key factor pushing overall service costs higher, driven primarily by an acceleration in owners’ equivalent rent. The core services ex-housing or the ‘supercore’ also accelerated in September, rising 0.6% MoM from 0.4% MoM in August, pushing the twelve-month change to a six-month high of 4.6%.

Core goods prices remained in deflationary territory for the fourth consecutive month, falling 0.4% MoM. Used vehicle prices (-2.5% MoM) accounted for the bulk of the pullback, while new-car price inflation remained at 0.3% though apparel (- 0.8% MoM) and medical commodities (-0.3% MoM) also saw a small pullback in price growth.

Mild CPI reading likely keeps the Fed on track to remain on hold

The September CPI reading delivered few surprises, with the core measure coming in spot on expectations, and headline just a tick higher. While the monthly price gains for core inflation have firmed, the underlying trend remains favorable. The annual core CPI now sits at a two-year low of 4.1%.

The inflation slowdown remains bumpy and there is still a lot of ground to cover before returning inflation to 2% and, given the continued resilience of the labor market, there is plenty of opportunity for progress to stall over the coming months. While the goods sector continues to make progress with disinflation, rents disinflation stalled and other core services categories are still seeing solid price increases. We see almost even odds between the Fed hiking rates again or holding steady for the rest of the year, with the odds slightly favoring a hold.

Fed officials have been raising interest rates since March 2022 in an effort to slow economic growth and wrestle inflation under control. It has been slowing for months, and price increases in September were still picking up amid at a much less rapid pace than they had been in 2022. Even so, policymakers are likely to keep the door open to a final rate increase this year. The market expectation around the possibility of a rate hike has increased marginally. Fed officials have been emphasising the importance of the increase in Treasury yields as a factor that will tighten financial conditions and reduce the need for another rate hike. Fed officials in recent days have signaled that they are likely to hold short-term interest rates steady at their next meeting, Oct. 31-Nov. 1, because a run-up in long-term interest rates over the past month could slow the economy.

Source: BIMB Securities Research - 13 Oct 2023