Core Inflation Eases in October
|The CPI rose 0.4% in October, but the boost from gasoline prices masks the underlying easing in core inflation. The October CPI report is unlikely to materially change the Fed’s near-term outlook.
Headline Masks Cooling in Underlying Inflation
Headline inflation was up 0.4% in October, marking the largest one-month gain in eight months. But, the headline was boosted by a 3.7% pop in gasoline prices. Stripping out the volatile food and energy components, however, core CPI was up a more modest 0.2% in October.
Core prices are now up 2.3% over the past year and are rising 2.2% on a three-month annualized basis. This marks a significant slowdown from the 3.4% annualized pace just a couple months ago.
There appear few signs of price pressure stemming from tariffs. Despite the 15% tariff on roughly $111 billion of imports from China that went into effect in September, overall core goods prices fell in October, the first month we might expect to see a boost from tariffs. Prices of apparel and household furnishings, which became exposed to tariffs in September, actually declined over the month. By our calculation, the lift to annual headline inflation coming from tariffed categories was only about 0.04 percentage points.
Overall core goods prices declined 0.1%, despite an uptick in used car prices (+1.3%), which look to have moved back in line with auction prices. Medical care commodities, up 1.2%, also added to core goods inflation.
Core services prices therefore continue to underpin overall inflation, though the gains here were also weak in October. Shelter prices rose a modest 0.1%, held back by a weak print for rents. In fact, rent saw the smallest one-month gain since 2013, which is hard to square with the low vacancy data for rental units. Airfare prices also weighed on core services inflation, declining 0.4%. But, given the run-up in airfare prices in recent months a pull-back here is not too surprising.
October Inflation Unlikely to Materially Change the Fed’s Outlook
October’s ease in core inflation suggests the underlying trend, while running in line with the Fed’s target in recent months, is still not running at levels that would materially change its outlook. Powell expressed a “wait-and-see” approach to policy after the FOMC October policy meeting and this report doesn’t appear to alter its current views.
The PCE deflator—the Fed’s preferred inflation gauge—trended to 2% in 2018, but has fallen back since. In fact, this measure has run below the FOMC’s target for all but 11 months of this 10+ year expansion. Given the undershoot in PCE inflation, we suspect policymakers’ concerns about inflation still remain skewed toward it running too cool rather than too hot, and, barring a material resolution to trade policy, we expect the Fed will cut rates another 25 bps in the first quarter of next year.
While we expect the trend in inflation to firm, dimmer prospects for U.S. growth amid the ongoing trade war will likely prevent inflation from breaking meaningfully above the Fed’s target in the near-term.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.