Posted by Jeffrey J. Roach, PhD, Chief Economist
Thursday, October 12, 2023
Key Takeaway: The rise in shelter costs in September was the largest contributor to headline inflation but will not likely show up in upcoming months as rent prices moderate. Annual core inflation decelerated to 4.1% in September from 4.3% the previous month.
Highlights from the September Consumer Price Index (CPI) Report:
- Annual headline inflation was 3.7%, unchanged from August as firms are still able to pass along higher wholesale prices.
- Core inflation decelerated to 4.1% in September, slightly below the previous month’s rate of 4.3%.
- Shelter was the largest contributor to the monthly increase in consumer inflation, accounting for over half of the increase, but this category should not be as impactful in the coming months as softer rent prices work their way into the official government metrics.
- Costs of medical care services fell -2.6% from a year ago, indicating that some categories are getting less sticky.
- Used vehicle prices fell in September for the fourth consecutive month, pulling the annual decline down to -8%.
- Markets are still processing the implications of the latest report. Some shorter duration yields spiked up to the levels reached after the strong payroll report last week.
Bottom Line: Core inflation less shelter is not as sticky as it had been last year or earlier this year. Market expectations are unchanged for what the Federal Reserve (Fed) will do at the November meeting. However, investors should be carefully watching oil prices for insight into how the Fed will act at the December meeting.
Inflation Coming Down, Remains Above Fed’s Target
The September CPI data provides an updated view of the inflation situation in the United States. While certain components of the report indicate inflation is slowing, there are underlying variables that continue to influence the total rate. According to the September CPI report, consumer prices rose by 3.7% year over year, the same annual rate recorded in August. Although this is a reduction from the high levels seen in 2022, it is crucial to remember that inflation remains above the Fed’s long-run 2% target.
Shelter Costs and Headline Inflation
The large rise in shelter costs was a key factor in September’s consumer inflation report. This surge was the main driver of headline inflation for the month, contributing more than half of the increase. Although shelter prices were significant this month, their impact is not anticipated to be as strong in the following months. Rent prices are off their peak according to industry reports, and investors should also know that there is a sizable lag in time between a reported movement in industry rental data and the official government metrics.
Core inflation excluding shelter was unchanged from the previous month and up only 1.9% from a year ago. Clearly, the inflation experience on homeowners is quite different than the experience felt by renters.
Deceleration in Core Inflation
The September figures reveal several noteworthy trends, one of which is the apparent slowdown in annual core inflation. This measure dropped to 4.1% from 4.3% in the previous month, showing a moderating trend in core inflation rates. Core inflation excludes the volatile components of food and energy, providing a more stable gauge of price movements in the economy. This moderation in core inflation could be attributed to several factors, including a decline in durable goods such as used cars and lower prices for medical care services.
Inflation will likely lose more of its stickiness in the coming months as the official rent component eases in line with industry observations.
Insights from the September CPI Report
In September, we saw price declines in a number of industries, including airfare, pre-owned cars, and clothing. Apparel prices fell the most in September since the middle of the pandemic. Perhaps now is the time to update the wardrobe but look for alternative ways to watch Leo Messi, the superstar of the Miami soccer team. Tickets to sporting events rose the fastest pace since mid-2021 as fans were eager to see arguably the best soccer player of all time. These patterns highlight how consumer tastes and the overall economic environment are always changing and can impact the real economy. As a side note, the “Taylor Swift” effect is real.
When excluding housing-related costs, consumer inflation showed a 1.9% increase from a year ago (See Inflation Dashboard below). A potential fall in consumer demand for travel-related services may suppress some categories in the coming months. Certain businesses, such as hospitality and tourism, will be impacted by this changing consumer behavior.
Concluding Thoughts
Markets are still processing the implications of the latest report. Some shorter duration yields spiked up to the levels reached after the strong payroll report last week. Core inflation less shelter is not as sticky as it had been last year or earlier this year. Market expectations are unchanged for what the Fed will do at the November meeting. However, investors should be carefully watching oil prices for insight into how the Fed will act at the December meeting.
Given the anticipated easing in rent prices in the upcoming months, core inflation, which increased 4.1% from a year ago, will likely decelerate further this year.
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