The 0.4% headline CPI for October matched the expected reading; this follows 0.3% rate in September. The core rate was a little lower than the expected reading at 0.1%, following an increase of 0.1%. On a 12-month rate-of-change basis, the seasonally adjusted headline and core rates are now 1.6% and 2.1% higher, respectively.
The CPI’s energy price index jumped by 3.5% in October. If we exclude the effects of energy, the CPI would still have been 0.1% higher sequentially in October and was 1.8% higher than a year ago. The CPI excluding food prices would have been 0.4% month-to-month and was 2.0% higher year-over-year. Food and energy combined account for slightly less than 25% of the entire CPI. Among the major core components, the BLS reported that the index for shelter (which is 34% of the CPI) rose by 0.4%, and the indices for apparel, new vehicles, and motor vehicle insurance were all strong contributors. Medical care services prices were unchanged (smallest increase since June 2015) following an also relatively soft 0.2% rise. Any drag largely came again from personal care, communication, prices for used motor vehicles, recreation and airline fares.
It is once again worth noting that the “services less energy services” component of the CPI accounts for 59.8% of the entire index and is growing by 3.0% annually. This has been an important anchor helping offset any commodity-related decreases in prices.
October’s increase in the core CPI was again largely driven by the main components of shelter, with a slightly slower pace of medical care price acceleration. Energy prices were a key positive contributor at the headline level. With the economy closer to full employment, we should start to see some increase in wage growth; so far, any increases have been spotty and mixed. With demand growth still relatively lackluster despite the best efforts of the central banks globally, inflation as a whole is still only firming slightly. The Trump election should add to this however, thereby increasing the likelihood of the Fed achieving—and also likely beating—its inflation target. TIPS yield spreads have moved upward tangibly as a result of this change in Washington, but further gains should be more limited until we at least get some additional clarity on both actual policy changes and, importantly, the offsets in terms of spending cuts. The degree of overshoot the Fed will tolerate, meanwhile, also remains an open question. When asked about allowing for overshoots on unemployment last month, Fed Vice Chair Stanley Fischer said that “in the past, attempts to overshoot have not been successful.” He opposes a big unemployment overshoot, but not necessarily a small overshoot as long as “we don’t wait until the inflation rate tells us we’ve gone too low; that would be too late.”
For a copy of this report or to subscribe to the Economics Weekly or Economic Indicators reports, please contact your William Blair representative.
Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.