Although weighed down by another drop in gasoline prices, the CPI for October was unchanged amid a pickup in core inflation. The Fed will pay closer attention to core inflation in the coming months.
Core Services Continue to Lift CPI
Consumer prices were unchanged in October as another drop in energy costs was offset by modest increases in food and services. With crude oil tumbling in recent months, consumers saw gas prices drop 3.0 percent during October. Prices are down 5.0 percent compared to last year, which should help to pad consumers’ wallets ahead of the holiday shopping season. However, electricity costs have risen 3.1 percent over the same period, likely tempering the rate at which savings from gasoline are directed into discretionary purchases.
Food prices have risen sharply over the past year, but are beginning to show signs of easing. The food index rose 0.1 percent in October, the smallest increase since June. Four out of the six grocery store categories posted an increase, including dairy products, which are now up 5.6 percent over the past year. Prices for meats, poultry & fish took a bit of a breather during the month, but are still up 8.5 percent over the past 12 months. Just ahead of Thanksgiving, other poultry prices, including turkey, were down slightly from a year ago.
Despite the high profile decline in gas prices and moderation in food inflation, there continues to be signs of modest inflationary pressure. Core CPI rose 0.2 percent in October, pushing the year-over-year rate back up to 1.8 percent. Core services, which account for nearly 60 percent of the CPI, have provided a steady lift to inflation over the past year, rising 2.5 percent. The most sizeable source of support has come from shelter costs, although nearly all other major sub-indices have also risen.
In contrast, weak global demand and the strengthening in the dollar have kept a lid on core goods prices. Commodities excluding food and energy are down 0.2 percent over the past year, with only tobacco products and medical commodities—i.e. pharmaceuticals—ahead of headline inflation.
Fed Will Focus on Core Inflation in the Near Term
Headline inflation has moderated from a comfortable 2.1 percent pace in June to now just 1.7 percent on a year-ago basis and is likely to trend down further in the months ahead as oil prices have yet to show a clear sign of bottoming. If crude oil and gasoline prices stay near current levels, the 12-month rate of change is likely to look worryingly low relative to the Fed’s 2.0 percent inflation target until this time next year. However, we believe the Fed will look through the current downtrend in headline inflation and focus on near-term fluctuations in the core index to more accurately gauge the underlying trend in inflation. Despite some softening in recent months, today’s increase supports our view that core inflation should trend gradually higher as the U.S. economy strengthens and labor and industrial slack diminishes.
Core Services Continue to Lift CPI
Consumer prices were unchanged in October as another drop in energy costs was offset by modest increases in food and services. With crude oil tumbling in recent months, consumers saw gas prices drop 3.0 percent during October. Prices are down 5.0 percent compared to last year, which should help to pad consumers’ wallets ahead of the holiday shopping season. However, electricity costs have risen 3.1 percent over the same period, likely tempering the rate at which savings from gasoline are directed into discretionary purchases.
Food prices have risen sharply over the past year, but are beginning to show signs of easing. The food index rose 0.1 percent in October, the smallest increase since June. Four out of the six grocery store categories posted an increase, including dairy products, which are now up 5.6 percent over the past year. Prices for meats, poultry & fish took a bit of a breather during the month, but are still up 8.5 percent over the past 12 months. Just ahead of Thanksgiving, other poultry prices, including turkey, were down slightly from a year ago.
Despite the high profile decline in gas prices and moderation in food inflation, there continues to be signs of modest inflationary pressure. Core CPI rose 0.2 percent in October, pushing the year-over-year rate back up to 1.8 percent. Core services, which account for nearly 60 percent of the CPI, have provided a steady lift to inflation over the past year, rising 2.5 percent. The most sizeable source of support has come from shelter costs, although nearly all other major sub-indices have also risen.
In contrast, weak global demand and the strengthening in the dollar have kept a lid on core goods prices. Commodities excluding food and energy are down 0.2 percent over the past year, with only tobacco products and medical commodities—i.e. pharmaceuticals—ahead of headline inflation.
Fed Will Focus on Core Inflation in the Near Term
Headline inflation has moderated from a comfortable 2.1 percent pace in June to now just 1.7 percent on a year-ago basis and is likely to trend down further in the months ahead as oil prices have yet to show a clear sign of bottoming. If crude oil and gasoline prices stay near current levels, the 12-month rate of change is likely to look worryingly low relative to the Fed’s 2.0 percent inflation target until this time next year. However, we believe the Fed will look through the current downtrend in headline inflation and focus on near-term fluctuations in the core index to more accurately gauge the underlying trend in inflation. Despite some softening in recent months, today’s increase supports our view that core inflation should trend gradually higher as the U.S. economy strengthens and labor and industrial slack diminishes.
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