September CPI preview: Sticky-looking core to be temporary

Summary

The overall progress in reining in decades-high inflation should be on display with the September CPI report. We look for the headline to advance 0.1%, which would bring the year-over-year rate down to 2.3% and point to headline PCE rising 2.0%—directly on the FOMC's target in what will be the last read on inflation before the Committee's November 7 meeting.

Reducing core inflation remains more of a grind. We estimate the CPI excluding food and energy will post another "low" 0.3% increase (0.26% unrounded) in September, which would lead the year-over-year rate to slip back to 3.2%. Although we expect a similarly-sized gain as in August, the drivers are likely to be different. Core goods prices look poised to take a temporary breather from the deflationary trend we believe is still underway, while core services inflation should moderate amid smaller gains in shelter and travel prices.

Looking ahead, the strike among East and Gulf Coast dockworkers presents a near-term upside risk to goods inflation. For now, however, we expect minimal effects on consumer goods prices due to the improved picture for retail inventories and softer demand environment compared to a few years ago. Services inflation should recede further in the months ahead as the cooler rental market feeds through to official measures of shelter inflation and the jobs market softens. We look for the monthly pace of core CPI to downshift to around 0.20% through the remaining months of the year and, of more focus for the FOMC, for the 12-month change in core PCE inflation to ease to around 2.25% by this time next year.

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