Core CPI Again Beats Expectations; Inflation Weighing on Retail Sales

Key Takeaways:

• The minutes from the Federal Open Market Committee’s (FOMC) September 20-21 meeting showed that committee members anticipated ongoing increases in the federal funds rate would likely be appropriate. Further, “many” participants “had raised their assessment” of the ultimate terminal rate that would be needed to combat inflation and that once the Fed’s policy stance reached an appropriately restrictive level, it would likely be appropriate to keep it there for some time. Still, the minutes noted participants’ views of rising risks to the global and domestic economic outlook. As such, “several” participants noted “it would be important to calibrate” future tightening to mitigate “the risk of significant adverse effects on the economic outlook.”
• The Consumer Price Index (CPI) increased 0.4 percent in September, the largest gain since June, according to the Bureau of Labor Statistics (BLS). For the third consecutive month, gasoline prices provided a significant drag to the headline number, declining 4.9 percent over the month. Food prices remained hot, however, posting a 0.8 percent gain over the month and an 11.2 percent increase compared to a year ago. Excluding food and energy, core CPI increased 0.6 percent for the second consecutive month and was up 6.6 percent annually, the highest reading since 1982, exceeding the previous cyclical high of 6.5 percent in March. Large contributors to the core CPI reading include new vehicle prices and shelter costs, both up 0.7 percent, and medical care services, up 1.0 percent. Apparel and used car prices each dragged, declining 0.3 percent and 1.1 percent, respectively.
• The Producer Price Index (PPI) increased 0.4 percent in September, breaking its streak of two consecutive monthly declines, according to the BLS. On an annual basis, the PPI decelerated one-tenth to 8.5 percent, the lowest level since July 2021. Final demand for food prices were up 1.2 percent and energy costs rose 0.7 percent. Final demand for services prices rose 0.4 percent over the month and 6.8 percent over the year. Core PPI (less food, energy, and trade services) increased 0.4 percent, the fastest monthly rate since May, and was up 5.6 percent annually.
• Retail sales and food services were flat in September, according to the Census Bureau. However, the weak headline number was due in part to a 1.4 percent drop in gasoline station sales, reflecting lower prices, and a 0.6 percent pullback in spending at automobile dealers, reflecting ongoing supply shortages in the auto industry. Sales at restaurants and bars rose 0.5 percent following a robust 1.8 percent gain the month before. Core retail sales, which exclude food services, autos, building supplies, and gas stations, rose 0.4 percent and were upwardly revised in August from a flat reading to a 0.2 percent increase.
• The National Federation of Independent Business (NFIB) Optimism Index increased 0.3 points to 92.1 in September, its third consecutive monthly increase. On net, 23 percent of firms plan to increase employment, an improvement of 2 percentage points from August. The sales outlook looks somewhat brighter as the net percent of firms expecting higher real sales in the next six months improved by 9 points to negative 10 percent. The net percentage of firms raising average selling prices declined 2 percentage points to 51 percent, the lowest level in a year, while the net percentage of firms raising worker compensation ticked down 1 percentage point to 45 percent. Thirty percent of firms cited inflation as their single most important problem, an increase of 1 percentage point.

Forecast Impact:

September’s CPI report felt like a rinse and repeat of August: Headline inflation, helped in part by another decline in gasoline prices, was in line with our expectations, while core CPI came in hotter than we had forecast. With wholesale gasoline prices stabilizing and possibly increasing in the near term given the OPEC+ decision to cut oil production, the risks to our near-term inflation forecast are to the upside. While we’re seeing encouraging signs on the inflation front from other surveys, such as private rent measures, shipping costs, used car auction data, the ISM surveys, and this week’s NFIB survey showing another (albeit small) decline in the percentage of firms raising average prices, these have yet to manifest themselves in official government data. We continue to expect that the Fed will maintain its aggressive tightening posture.

Nominal core retail sales posted a decent gain in September, but, considering the broad-based price increases that continued during the month, we think this report is supportive of our forecast for below-trend near-term real personal consumption growth as the temporary decline in energy prices seemed to do little to spur spending elsewhere. Restaurant sales again outperformed the headline retail sales figure, but it grew at a much slower rate than in August, reflecting relative strength in services spending but still a slowing trend. We continue to expect personal consumption growth to weaken and eventually turn negative next year.

Nathaniel Drake
Economic and Strategic Research Group
October 14, 2022

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