Latest Forecasts Hint At Bleak November CPI Inflation Report

Nowcast data looks disappointing for October’s U.S. CPI inflation data. Currently the inflation nowcast from the Federal Reserve Bank of Cleveland has October inflation running at 0.8% month-on-month, with core inflation at just over 0.5%. Of course, we’ve just over half-way through October, so the numbers could change, but currently they don’t look good.

This would imply an increase in month-on-month inflation for the months of July to September as falling energy prices, which can be volatile, are no longer expected to bring down the U.S. inflation rate.

This is because energy prices are up slightly for October so far, albeit down slightly from highs earlier in the month. If this nowcast holds, it would imply little change to the annual U.S. CPI inflation rate in terms of annual inflation.

CPI Announcement Timing

October 2022’s CPI data is to be reported on at 8.30am Eastern Time on November 10th, 2022. It comes at a time when many hoped inflation would moderate, especially against high comparable periods from 2021, for example for October 2021 a 0.9% month-on-month rise in prices was reported in the CPI.

Sticky Inflation

The Fed’s main fear that that U.S. inflation becomes entrenched. Though medium-term inflation-expectation surveys have remained fairly subdued, the Fed clearly wants inflation to come down. There’s little evidence of that in recent data. This is one reason why the U.S. Federal Reserve (Fed) is expected to increase rates significantly in early November. Yes, certain series such as apparel and used cars fell in the most recent September report, but the large categories that drive the index such as shelter and food continue to rise.

Housing Costs May Continue To Rise Due To CPI Methodology

Shelter costs may continue to rise in the October CPI report. Part of the reason for that are the statistical nuances for how housing or rental costs are determined by the CPI. The CPI uses a panel approach to determine rental costs and all the prices are not sampled every month but using a six-month window across across six of housing panels. The CPI does this to obtain a more accurate fix on housing costs, but it creates a lag in the data.

This means that the CPI estimate of shelter costs tends to follow the housing market but with a lag. Also, because the CPI is just focused on the cost of living in a home, not its total value the swings in price can be lower than for house prices. Researchers estimate that the shelter costs follow house prices, but with a lag of around a year and half. However, the impact from rising house prices is smaller in the CPI. Given that house prices in the U.S. have only started to falter in recent months, we may not see shelter costs decline in the CPI until 2023. That’s not good news for those hoping for lower CPI inflation because shelter costs makes up about one third of the CPI index. If shelter costs continue to rise, that will limit how much the CPI inflation is able to decline.

The Market Reaction

As we saw with the CPI report for the month of September, the market is unsure what to make of current inflation data. October 13 2022, the day of the CPI announcement produced one of the largest swings in the S&P 500 over the course of a single trading day, with the markets first falling sharply and then rallying strongly to the close.

This reflect the fact that, yes, inflation is a clear problem currently, but the Fed is expected to raise rates in their remaining meetings in 2022. The Fed frequently discuss how monetary policy works with unpredictable lags.

A pessimist would argue that the Fed is not doing enough even with is expected further hikes in 2022, and will have to hike rates further in 2023. On the other hand, an optimist might argue that it’s too early for the impact of the Fed’s significant 2022 rate hikes to be felt in inflation data just yet, and hold out hope that inflation will come down in 2023 without big moves from the Fed. So even if inflation does come in hot at the next CPI report as nowcasts suggest is possible, the market’s reaction may be harder to gauge.