Core CPI Remains Elevated but is Likely to Continue to Gradually Decelerate

Key Takeaways:

• The Consumer Price Index (CPI) increased 0.2 percent over the month in September and 2.4 percent compared to a year ago, another cycle low, according to the Bureau of Labor Statistics (BLS). Core inflation was a bit stronger, rising 0.3 percent over the month and 3.3 percent compared to a year prior, an acceleration of one-tenth compared to last month for the latter. Core goods prices rose 0.2 percent in September after experiencing small declines in each of the prior three months. Several core services, including medical care (+0.7 percent), motor vehicle insurance (+1.2 percent), and airline fare (+3.2 percent) posted strong gains. Both rent of primary residence and owners’ equivalent rent, the two primary components of shelter inflation, increased by a more modest 0.3 percent over the month, compared to gains of 0.5 and 0.4 percent in the prior two months.
• The Producer Price Index (PPI) was flat in September, bringing the year-over-year comparison down one-tenth to 1.8 percent, according to the BLS. Core PPI (excluding food, energy, and trade services) increased just 0.1 percent, and August’s gain was revised downward by one-tenth to 0.2 percent. Compared to a year ago, core PPI rose 3.2 percent, a slowdown of one-tenth compared to August.
• Consumer (non-mortgage) credit outstanding increased by $8.9 billion in August following a $26.6 billion jump in July, according to the Federal Reserve Board. Revolving credit outstanding (largely credit cards) declined by $1.4 billion, while nonrevolving credit outstanding (largely student and auto loans) increased by $10.3 billion.
• The National Federation of Independent Business (NFIB) Small Business Optimism Index increased 0.3 points to 100.2 in September after declining 2.7 points the month prior. 19 percent of firms are planning to make capital expenditures in the next three to six months, a decline of 5 percentage points and the lowest level since April 2023. On net, negative 9 percent of firms expect real sales to be higher in the next six months, an improvement of 9 percentage points month over month. 34 percent of firms report having positions they are not able to fill, a decline of 6 percentage points and the lowest level since early 2021. 23 percent of businesses stated that inflation was the single largest problem they were facing, the most commonly selected answer. Quality of labor was the second most common response at 17 percent.
• The real goods U.S. trade deficit narrowed by $8.6 billion in August, according to the Census Bureau. Real exports rose by 3.8 percent, while real imports declined by 1.3 percent.
• The Minutes from the Federal Open Market Committee’s September 17-18 meeting showed that a “substantial majority” of participants supported the decision to cut by 50 basis points rather than 25, but “some participants” may have supported a 25-basis point cut decision instead. The minutes also noted that labor market conditions had “eased further.”

Forecast Impact:

Core CPI remained a bit stronger than markets had expected in September, though it was still in line with our expectations for the quarter. Some of the underlying details, such as an increase in core goods prices and a sharp rise in some non-shelter services, did point to somewhat stronger underlying inflation pressures than expected but likely don’t alter the broader decelerating trend in inflation. Further, several of those components, including auto insurance and medical care services, are measured differently in the Fed’s preferred PCE inflation measure and thus may not translate to a pickup in core PCE. Additionally, the softer gains in September’s PPI help to assuage fears that inflation could reaccelerate. Overall, the Fed appears on track for a 25-basis point cut in November, in line with our expectations.

While the NFIB survey remained downbeat in general, there was a notable improvement in firms expecting higher sales and firms with jobs they are unable to fill. The former is supportive of continued consumption strength, while the latter suggests inflation pressures from wages are unlikely to derail future inflation progress. Additionally, revolving credit outstanding as a ratio of income remains within normal historical levels, which is supportive of sustained consumption growth in line with our thinking following previously mentioned upward revisions to personal income data.

Nathaniel Drake
Economic and Strategic Research Group
October 11, 2024

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