Once again, higher energy prices pushed up the headline consumer price index (CPI) in September. The index jumped up 0.5% on the month in line with expectations. As a result, inflation on a year-on-year basis also moved up to 2.2% in September from 1.9% in August.
Similar to August, a 6.1% month-on-month (m/m) pop in energy prices helped lift headline inflation. Refinery shutdowns related to Hurricane Harvey reduced the supply of gasoline, and prices at the pump rose 13.1% in September. Despite speculation about higher food prices, the food index only rose 0.1% in September, and is only up 1.2% on the year.
Core inflation rose a disappointing 0.1% m/m in September, which leaves the year-on-year pace unchanged for the fifth month in a row, at 1.7%.
Both core goods (-0.2% m/m) and core services (-0.2% m/m) prices lost momentum. Underneath the surface, the shelter index continued to increase (+0.3%), and the indexes for motor vehicle insurance (+0.5%), recreation (+0.2%), education (+0.3%), and wireless telephone services (+0.4%) also rose. However, these increases more than offset declines in the indexes for new vehicles (-0.4%), household furnishings and operations (-0.3%), medical care (-0.1%), and used cars and trucks (-0.2%).
The BLS noted that new vehicle prices are now 1% lower than they were a year ago, the largest 12-month decline since the recession.
The BLS cited that Hurricane Irma had a small impact on data collection in some areas of Florida in September.
Key Implications
Well, this is disappointing. Another 0.1% monthly increase in core inflation adds to worries about when the soft spot in U.S. inflation will end. Notably, core services inflation held up a bit better than core goods where price deflation accelerated. It may be that the impact of the past appreciation of the U.S. dollar is taking longer to abate than previously expected. Moreover, the loss of momentum in auto sales, which is clearly putting downward pressure on prices, isn’t helping.
We continue to expect that those exchange rate impacts will ebb, and goods prices should help lift inflation higher over the coming two years. And, as slack in the domestic economy diminishes further, services prices are also likely to perk up. However, this process is taking longer than previously expected, which reduces our confidence in a December rate hike somewhat.
