US CPI: Soft headline, but core inflation is strengthening - Wells Fargo

Consumer price inflation rose more slowly in October due to a pullback in energy prices, but core inflation picked up, explained analysts from Wells Fargo. According to them reflation increasingly looks to be back on track which will support further tightening from the Federal Reserve. 

Key Quotes: 

“Inflation was toned down in October with the Consumer Price Index increasing 0.1 percent after two months of 0.4 percent-plus gains. The yearover-year rate subsequently edged back down to 2.0 percent. The slowdown reflected a decline in energy prices as the supply disruptions surrounding Hurricanes Harvey and Irma abated.”

“Food prices were flat in October and have continued to increase more slowly than other items over the past year, up 1.3 percent. Excluding food and energy, inflation was noticeably stronger. The core index rose a “high” 0.2 percent (0.225 percent before rounding). That pushed the year-over-year change up to 1.8 percent. The performance over the past three months is even more impressive; core prices have advanced at a 2.4 percent annualized rate, making the slowdown in inflation earlier this year look increasingly temporary.”

“The Fed has struggled this year in determining if the slowdown in core inflation has been due to a confluence of one-offs or more persistent disinflationary forces. We have been of the mindset that the pullback has been due primarily to a few unique factors that look unsustainable.”

“The pickup clears the way for a December rate hike and supports the case for continued tightening in the year ahead.”

“The FOMC, however, will be watching the PCE deflator more closely. While much of the early estimates for the PCE deflator are derived from the CPI report, healthcare, which is about twice as important in the PCE deflator, is derived from Producer Price Index (PPI) estimates.”