On Thursday October 12 at 8.30 pm E.T., the Consumer Price Index report for the month of September will be released. Core inflation (excluding food and energy) has been on a generally declining trend for much of 2023, but nowcasts suggest cooling core inflation will continue. That’s despite headline inflation ticking up due to rising energy prices for the month of September that the CPI report covers.
Recent Trends
Since March 2023 prices for goods and services have generally cooled. Prices are still rising, but considerably less aggressively than in the 2021-2022. That’s reflected prices across the three main categories that the Federal Reserve uses for high level analysis, namely, goods, services and housing. These are all seeing generally slower price prices with some annual declines across a mix of categories, especially in goods, from various foods to used cars.
Energy Costs
However, a recent spike in energy costs has helped push up headline CPI in August and that trend may continue into September as oil prices moved up further for the month. Oil prices have dropped back sharply in October, which may help cool that month’s CPI report released in November. Still, that won’t be captured in the upcoming September CPI numbers.
Nowcasts
Nowcasting from the Cleveland Fed currently sees CPI inflation for the month of September coming in at 0.39% for the month for headline CPI and 0.36% for core CPI, once food and energy are stripped out. That translates to 3.7% annual rate for headline CPI and 4.2% for core CPI. If this nowcast holds it would continue the recent trend of headline inflation accelerating as core inflation cools.
The Fed tends to focus more on core CPI as indicative of longer term inflation trends. Here a decline would be welcome, but the Fed is still concerned that inflation of around 4% still has some way to go to its 2% annual goal. It should also be remembered that nowcasts have tended to overstate inflation in recent months.
Numbers To Watch
One of the month significant numbers in Thursday’s CPI report will be shelter costs. Shelter makes up a large portion of most households’ expenditures and so carries a high weight in the CPI series. Recently, shelter costs have seen disinflation and if that trend continues, it may help move core CPI lower.
Then, the Fed will also be looking at services costs more broadly. Here there was concern that rising wages, which are a large component of providing services, would continue to fuel rising services prices. Recently, the Atlanta Fed’s Wage Growth Tracker has signaled that wage growth may have peaked and is decelerating. The upcoming CPI report will inform how this trend is playing out across a diverse range of services from financial advice to healthcare.
The Fed’s Reaction
The Fed is watching incoming data closely and may raise rates one more time in 2023 if it doesn’t see inflation continue to cool. Therefore, the Fed will be looking for continued evidence of inflation moving back to its 2% annual goal.
The Fed’s recent formal communications showed a broadly even split between raising rates and holding them steady over the remainder of 2023. Fixed income markets as assessed by the CME FedWatch Tool are more dovish, believing that the chance of a November or December interest rate hike is fading somewhat.
The current assessment is that there’s currently a 1 in 4 chance of a hike coming in November or December according to the implicit forecast of fixed income markets. The upcoming CPI report will be informative, it’s possible headline inflation moves up based on energy costs, but the Fed will be watching core CPI closely for further evidence of inflation moving back to its 2% goal.
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