Consumer price inflation increased by 0.4% month-on-month (m/m) in October, matching the gain in September. On a year-over-year (y/y) basis, headline inflation edged lower by 0.5 percentage points (pp) from September, slowing to 7.7%.
Energy prices increased by 1.8% m/m, as gasoline prices were higher by 4.0% m/m, while energy services declined by 1.2% m/m. Food prices rose 0.6% m/m (following the 0.8% m/m gain in September), and are up 10.9% y/y.
Core inflation (excludes food & energy) rose 0.3% m/m – a meaningful deceleration from September’s 0.6% m/m. Relative to last October, core inflation sits at 6.3% – down 0.3 pp from last month’s reading of 6.6% y/y.
Price growth across core services (0.5 m/m) moderated from last month’s gain of 0.8% m/m. Shelter costs (0.8% m/m) were again a meaningful contributor – accounting for slightly more than two-fifths of October’s overall gain – with rent of primary residence (0.8% m/m) and owner’s equivalent rent (0.8% m/m) each notching sizeable gains. Prices paid for lodging away from home (4.9% m/m) was also higher, after recording a sizeable pullback (-1.0% m/m) the month prior.
- Other service categories including transportation (0.8% m/m), recreational (0.68% m/m) and education & communication services (0.1% m/m) also rose on the month, while price growth across medical services (-0.6% m/m/) were lower.
Core goods prices declined 0.4% m/m after recording a flat reading the month prior. Declines were seen across used vehicle prices (-2.4% m/m) and apparel (-0.7% m/m). Recreational goods (0.7% m/m) and new vehicle prices (0.4% m/m) were higher, while medical care goods were flat.
Key Implications
It’s been a while since CPI has surprised to the downside! This morning’s print bucked the trend, with the year-over-year reading of headline inflation easing to a pace not seen since the beginning of the year. The pullback in core goods prices was perhaps the most encouraging development, as it would appear that softening consumer demand is finally manifesting in (some) disinflationary pressure.
Despite market-based measures of rental costs having declined over the last several months, the shelter component of CPI continues to record sizeable gains. As we noted in a recent report, this is because new leases renewed at current market rates are folded in with existing rents which helps to smooth the overall impact. As a result, we are likely to see continued gains in the shelter component of CPI for at least another several months before the lagged effects of lower rents lead to sustained downward pressure on shelter costs.
While we suspect the Fed has reached a point where they’ll need to start dialing back on the pace of rate hikes, Chair Powell was explicit in his last press conference that the end-point has likely been revised higher. With inflation still a long way from target and the labor market historically tight, it is entirely possible that the fed funds rate reaches 5% by mid-2023.
