US CPI reviewed: reduces the urgency for the Fed to hike - Nomura

Analysts at Nomura offered a review of the disappointing US CPI.

Key Quotes:

"The Consumer Price Index for all items increased 0.3% (0.292%) m-o-m in September following a 0.2% increase in August, slightly lower than our forecast of a 0.4% (0.390%) increase but matching the market’s expectation of a 0.3% increase.

Within noncore components, food prices inched up slightly, by 0.02%, as expected (Nomura:+0.03%). Energy prices rose by 2.9%, also in line with our expectation (Nomura:+2.8%). However, the inflation of core goods prices excluding food and energy was slightly weaker than expected. The core CPI inflation rate decelerated to 0.1% (0.112%) m-o-m in September, modestly below expectations (Nomura: +0.233%, Consensus: +0.2%), from 0.3% (0.260%) in the prior month.

Most of the weakness in core CPI inflation was concentrated in the prices goods excluding food and energy, which declined by 0.1%, below our forecast of a 0.220% increase. Used car and truck prices fell by 0.3%, following a decrease of 0.6% in the prior month. Apparel and new vehicle prices, which are sensitive to import prices, declined 0.7% and 0.1%, respectively, despite some stabilization in imported consumer prices.

Although we have seen signs that the disinflationary pressure from the stronger dollar has been waning in import price data, the inflation of domestic core goods prices remains weak. This implies that it might take a longer time for the "transitory effects" of exchange rates on core PCE inflation to dissipate than FOMC participants expect.

The slow pace of inflation in recent months likely reduces the urgency for the Fed to accelerate the pace for a rate hike. Based on the latest data, our forecast for core PCE inflation in September now stands at 0.131% m-o-m, which would leave the y-o-y change rate unchanged at 1.7%. We continue to expect only a gradual increase in core PCE inflation."