Inflation Cools Despite Jump in Shelter Costs

Key Takeaways:

• The Consumer Price Index (CPI) increased 0.4 percent in September, according to the Bureau of Labor Statistics (BLS). On an annual basis, prices were up 3.7 percent, unchanged from August. Energy prices, which rose 1.5 percent due in part to a 2.1 percent gain in gasoline prices, were again a large contributor. Excluding food and energy, core CPI rose 0.3 percent over the month and 4.1 percent compared to a year ago, a deceleration of two-tenths compared to August. The rise in core prices was due in part to a 0.6 percent rise in shelter prices, double the monthly gain in August and the highest one-month gain since May. Core goods prices fell 0.4 percent thanks to a 2.5 percent drop in used car and truck prices, the fourth consecutive month of outright decline for both categories.
• The Producer Price Index (PPI) rose 0.5 percent in September as energy prices were up 3.3 percent following a 10.3 percent jump the month prior, according to the BLS. On an annual basis, the PPI was up 2.2 percent, an acceleration of two-tenths compared to August. Excluding food, energy, and trade services, core PPI rose 0.2 percent over the month and 2.8 percent over the year.
• The National Federation of Independent Business (NFIB) Small Business Optimism Index was down five-tenths to 90.8 in September, the second consecutive monthly decline. The net percentage of respondents expecting the economy to improve declined 6 percentage points to negative 43 percent following a 7-percentage point drop in August. 43 percent of firms reported having positions they are not able to fill right now, the highest share since May. 29 percent of firms report raising average selling prices, a 2-percentage point increase. At 23 percent each, inflation and quality of labor were reported as the two most important problems facing small businesses.
• The Minutes from the Federal Open Market Committee (FOMC) September 19-20 meeting showed officials divided about whether another rate hike would be necessary. A "majority" signaled that an additional rate hike would likely be appropriate, while “some” judged that further hikes would not be merited. Notably, the September meeting occurred before the recent surge in 10-year Treasury rates, suggesting financial conditions are tighter now than they were when the FOMC met.

Forecast Impact:

Consumer prices were in line with our expectations for September. On an annualized basis, core inflation remained above target for a second consecutive month, but this segment continues to be dominated by lagged measures of shelter costs. In fact, shelter prices bucked the recent downward trend in September by doubling its August gain, but measures of rent on newly signed leases, which lead the CPI measure, show a near-zero growth rate. Over time, these newly signed leases will continue to feed into lower measured shelter inflation in coming quarters. Evidence of outright deflation in the core goods space continues, indicating that improving supply in the auto industry and more normal supply chain conditions in the apparel industry are feeding through to lower consumer prices. We continue to expect a gradual cooling in inflation measures towards the Fed’s two-percent target.

Core producer prices continued to decelerate on a year-over-year basis and the NFIB survey did not show a major shift in inflation expectations in September (though nearly half of firms reporting labor is difficult to find is consistent with last week’s impressive jobs report). Given incoming data and the recent run-up in 10-year Treasury rates likely tightening financial conditions for them, we continue to expect the Fed is likely done with rate hikes in this cycle.

Nathaniel Drake
Economic and Strategic Research Group
October 13, 2023

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