• Consumer prices slowed to 3.2% YoY and flat at 0.0% MoM

• Core CPI rose 0.2% MoM and moderated to 4.0% YoY

• Core services decelerated lower

• Core goods prices remained in deflationary territory

• The Fed’s work is most probably done

Inflation in the US eased in October and price increases showed encouraging signs of slowing under the surface.

The overall Consumer Price Index (CPI) slowed to 3.2% YoY in October, lower than the 3.7% YoY reading in September and the coolest since July. That deceleration owed partly to more moderate energy prices. For the month, CPI was flat at 0.0% MoM. The energy index was down 4.5% YoY and fell 2.5% MoM as a 5.0% MoM decline in the gasoline index was more than offset the increases in other energy component indexes. Price increases for food were slower than a year ago but costs in October picked up slightly from the previous month. The food index increased 0.3% MoM in October, after rising 0.2% in each of the last 3 months. The index for food at home increased 0.3% MoM while the index for food away from home rose 0.4% MoM. On an annual basis, however, food prices rose less slowly compared to a year ago. They were up 3.3% YoY, down from 3.7% in September. That continues a recent trend of moderating food inflation.

However, excluding volatile food and energy, core inflation increased 0.2% MoM and 4.0% YoY. The annual level was the lowest since September 2021, though still well above the Federal Reserve’s 2% target. Housing costs rose more slowly, an encouraging sign of progress for one of the most stubborn holdouts in the battle to bring down inflation. Shelter costs rose 0.3% MoM in October, down from 0.6% in September reversing a surprising acceleration. The index for rent rose 0.5% MoM in October, and the index for owners’ equivalent rent increased 0.4% MoM. The shelter index was up 6.7% YoY, the first-time inflation in that category has fallen below 7.0% in more than a year. Rents were up 7.2% YoY, down from a peak of close to 9.0% earlier this year. Policymakers are generally optimistic that rent costs will ease as roughly 1 million multifamily rental units come online later this year and next. Already costs for new leases have cooled off.

Services inflation continues to ease as well, although progress remains slower than in the goods sector. Core services rose 0.3% in October, bringing the one-year change down to 5.5% from 6.7% this time last year. Shelter costs were a key factor pushing overall service costs lower, driven primarily by a smaller increase in owners’ equivalent rent. The so called “supercore” measure of inflation - services excluding energy and housing costs with the additional exclusion of health insurance, which the Fed keeps a close eye on due to wages and labour market tightness having a large influence, came in at a pretty benign 0.2% MoM rate, pulling the annual rate down to 3.8%.

Core goods prices remained in deflationary territory for the fifth consecutive month, falling 0.1% MoM. Used vehicle prices (-0.8% MoM) accounted for the bulk of the pullback, while new-car price fell 0.1% though apparel (+0.1% MoM) and medical commodities (+0.4% MoM) saw a small increase in price growth.

The Fed’s work is most probably done

US inflation has come down meaningfully over the past year after peaking in the summer of 2022, and the October CPI report showed evidence of continued progress. Fed officials are trying to wrestle price increases back to roughly the 2.0% pace that was normal before the pandemic by raising interest rates, which they hope will slow consumer and business demand.

While price increases have cooled considerably, that downward drift had recently stalled. Price increases had eased in part because supply chain problems that had pushed up the costs of many goods reversed, allowing prices for goods to stop rising or even fall. But Fed officials have been watching for evidence of further cooling in both housing and other services costs, which are more closely tied to the strength of the overall economy. The latest CPI report offered renewed evidence of progress on those critical fronts. A closely watched measure of housing costs moderated after unexpectedly ticking up in September. A measure of inflation in other services also came down notably.

Altogether, the data provided clear signs that inflation is headed in the right direction, an optimistic development for central bankers as they try to cool the economy just enough to bring down price increases without curbing its momentum so much that they spur a painful recession. Overall, it does suggest that inflation is continuing to slow down, and while it was just one report, it was an encouraging one as it is being driven by multiple things, not just one quirk.

Fed officials are watching inflation figures closely as they try to determine their next steps. Policymakers have raised interest rates to a range of 5.25% to 5.5%, up from near zero as recently as March 2022 in the hope of controlling price increases. They are now debating whether a final quarter-point rate move is necessary.

Fed officials have been clear that they expect to leave interest rates at elevated levels even once they stop raising them, hoping to keep steady downward pressure on consumer and business demand by making it more expensive to borrow money. October CPI report may give officials more confidence that their policy changes are working, and that they do not need to take further action to wrangle price increases. Still, we do not think the Fed will tell us if they are done but we do expect the central bank to hold off on further rate moves.

Over the past few months, officials have held off on raising rates to gauge whether their policies are working or if they need to push even harder. The data from October’s CPI would not drastically change the Fed’s plans moving forward. Officials have long said they need months of information - on prices, jobs, wages, spending and more - to understand where the economy is headed.

In a speech last week, Fed Chair Jerome Powell said the central bank would not hesitate to raise rates again if need be. In the meantime, officials will “move carefully” so they can balance “both the risk of being misled by a few good months of data and the risk of overtightening”.

October’s CPI report further reinforces our view that the last rate hike of this tightening cycle is behind us. The latest CPI data signal that inflation took another step forward on its long road back to 2% although the Fed’s job is not finished. That said, as 2023 draws to a close and 2024 comes into view, we suspect the debate next year will focus squarely on when rate cuts will occur.

Source: BIMB Securities Research - 15 Nov 2023