Elevated CPI Report May Lock-In 0.75 Percentage Point Hike For November

Today’s CPI inflation report saw 0.4% month-on-month inflation for September. Similar to the recent spike in wholesale prices for September, inflation is not falling as fast as the U.S. Federal Reserve (Fed) would like.

This likely reinforces the Fed’s commitment a 0.75 percentage point hike on November 2. This is because inflation continues to run ahead of target and the labor market is in reasonably good shape, giving the Fed some freedom to act aggressively.

The Bad News

The Fed wants to see inflation move closer to its 2% goal. Today’s monthly price move translates to almost 5% annualized inflation. That’s well ahead of the Fed’s target. Also if you look at the definition of inflation that strips out food and energy the year-on-year inflation exceeded the recent peak from March. Food and shelter, which are large parts of the CPI inflation series, continue to rise sharply in price.

The Good News

Still, there were some early positives in the data. Energy prices continued to move lower, as expected, and we saw drops in prices for clothing and used cars. These latter items are fairly small contributors to the overall inflation number, but price declines in some areas will be welcome.

Looking Forward

The market may also take some comfort that inflation is a something of a lagging indicator. We are starting to see house prices weaken, which hasn’t appeared in inflation data at this point, and indeed house prices are still up in most areas year-on-year.

These early signs suggests that the cost of shelter may ultimately soften over future periods. Shelter costs have a large weight in the inflation series, so falling house prices would likely go some way to tame inflation. Freight costs too, appear to be reducing, though again there’s not much evidence of that in the CPI series today.

One worry is that energy prices have moved up again in October, so far, after recent OPEC+ production cuts. That will likely mean that the benefit of falling energy prices, which has helped the inflation numbers in the July-September period could be ending, at least for now.

For example, the Cleveland Fed’s Nowcast of inflation for October 2022, which will be reported next month, has CPI inflation coming in high.

Of course, some of that is caused by a resurgence in energy prices, but a return to those sort of extremely high monthly numbers of around 1% month-on-month inflation, would be a real concern for the Fed and markets and offer little suggestion that inflation is under control. If that’s the case, we may see further rate hikes from the Fed in 2023.