Inflation Continues Cooling Trend, While Housing Starts Remain Strong

Key Takeaways:

• The Consumer Price Index (CPI) was flat in October, according to the Bureau of Labor Statistics (BLS). The flat print was due in part to a 5 percent decline in gasoline prices, though a few other categories including new and used autos and airline fare were also negative. Compared to a year ago, the headline CPI rose 3.2 percent, a deceleration of five-tenths compared to September and the lowest annual print since July. Excluding food and energy, core CPI rose 0.2 percent over the month and 4.0 percent compared to a year ago. Core CPI continued to be elevated by rent of primary residence, which rose 0.5 percent, and owners’ equivalent rent (OER), which increased 0.4 percent. Measures of newly signed leases continue to suggest shelter inflation will slow further in coming months.
• The Producer Price Index (PPI) fell 0.5 percent in October, according to the BLS. As with the CPI, the PPI benefited from a 6.5 percent decline in energy prices. Compared to a year ago, the PPI was up 1.3 percent. Excluding food, energy, and trade services, core PPI increased 0.1 percent over the month and 2.9 percent compared to a year ago.
• Retail sales and food services declined 0.1 percent in October following an upwardly revised September figure, according to the Census Bureau. However, the headline drop was due in large part to a 0.3 percent price-related decline in spending at gas stations, though sales at auto dealers and furniture/home furnishings stores were also negative. Restaurant and bar sales rose 0.3 percent. Control group retail sales, which feed into the personal consumption expenditures calculation for GDP, increased 0.2 percent.
• Industrial production, a gauge of output in the manufacturing, utility, and mining sectors, declined 0.7 percent to 102.7 in October, according to the Federal Reserve Board. Manufacturing output declined 0.7 percent to 99.0, though this was due to a UAW-strike related 10.0 percent drop in motor vehicle and parts manufacturing; manufacturing output excluding motor vehicles and parts was flat. Mining output rose 0.4 percent to 120.0, while utilities output declined 1.6 percent to 105.4.
• The National Federation of Independent Business (NFIB) Small Business Optimism Index declined one-tenth to 90.7 in October. On net, negative 32 percent of firms were reporting higher earnings this quarter, an 8 point drop compared to September. Firms reported quality of labor (23 percent) and inflation (22 percent) as their two most important problems.
• Housing starts rose 1.9 percent to a seasonally adjusted annualized rate (SAAR) of 1.37 million in October, according to the Census Bureau. Single-family starts were up 0.2 percent to a SAAR of 970,000, while multifamily starts rose 6.3 percent to a SAAR of 402,000, though September’s figure was revised downward substantially. Single-family permits increased 0.5 percent to 968,000, while multifamily permits were up 2.2 percent to a SAAR of 519,000, though this follows a 14 percent decline the month prior.
• The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index declined 6 points to 34 in November, its lowest level since December 2022. The index for single-family sales in the present declined 6 points to 40, while the index for sales in the next six months was down 5 points to 39. The index for traffic of prospective buyers declined 5 points to 21.

Forecast Impact:

Inflation data continued to cool broadly in line with our expectations. While headline inflation has been volatile due to large fluctuations in the price of oil, core prices are just 1.5 percent higher than they were six months ago, whereas compared to 12 months ago, core prices are 4.0 percent higher, pointing to meaningful more recent slowdown in underlying inflation. This measure should continue to slow as the CPI measures of rent and OER continue to approach more timely measures of rent increases on new leases, which show muted rent growth. Further, coolness in the PPI will likely continue to flow through to consumer prices.

Retail sales were a bit stronger than consensus expectations but still point to some slowdown (though not a halt) in consumer activity. We continue to expect consumption growth will slow in the fourth quarter as incomes have not kept pace with spending. Additionally, the industrial production numbers point to stagnation, even when adjusting for strike activity. This is consistent with our forecast for a broader slowdown in economic growth in Q4.

Single-family starts activity was above our expectations for October. The ongoing strength in single-family construction is directly at odds with the continued decline in homebuilder confidence. While the housing market index is typically a good predictor of future starts activity, the current divergence likely reflects the difference in sentiment between large and small homebuilders. Whereas the NAHB survey consists predominantly of small homebuilders, recent guidance from large public homebuilders who drive most of the starts activity has been upbeat. Still, the ongoing weakness in homebuilder confidence presents some downside risk to our starts forecast.

Nathaniel Drake
Economic and Strategic Research Group
November 17, 2023

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