Highlights:
- All items CPI rose 0.3% in October, lifting the year-over-year rate to 2.5%. That remains below the 2.9% peak seen in June and July when energy prices were providing even more upward pressure.
- Gasoline prices were up 3% on a month-over-month, seasonally adjusted basis. If the first half of this month is any indication, that move will be reversed in November.
- Ex food and energy inflation rose 0.2% following back-to-back gains of just 0.1%.
- Core goods prices were essentially flat relative to a year ago, while non-energy services prices continued to grow near a 3% year-over-year rate.
Our Take:
There were no surprises in this morning’s October inflation report. Headline CPI ticked up to 2.5% year-over-year from 2.3% in the previous month. As expected, higher energy prices were the culprit. That move should be reversed in November with gasoline prices having fallen over the last month and oil prices continuing to trend lower, including an eye-watering loss yesterday. Core inflation saw a trend-like 0.2% month-over-month increase in October but the year-over-year rate edged down to 2.1%. That rate has been above 2% for six months now in one of the most sustained periods of near-target inflation this cycle. With the economy operating at or beyond its longer run capacity limits, it isn’t surprising that core inflation seems to have found a floor around the Fed’s objective. But at the same time there is little evidence that inflation is breaking out to the upside. And we’ve seen little impact of higher tariffs on consumer prices thus far—a US dollar that is 6% higher than a year ago is likely providing some relief on that front. Well-behaved inflation allows the Fed to continue raising rates gradually. But looking at a broader set of indicators, starting with 3.8% GDP growth over the last two quarters, it is clear that monetary policy accommodation is no longer needed. We expect a rate hike in December—the fourth this year—and a continuation of once-a-quarter moves in 2019.
