The 0.3% headline CPI for September matched the expected reading of 0.3%; this follows 0.2% reading in August. The core rate was a little lower than the expected reading at 0.1%, following an increase of 0.3%. On a 12-month rate-of-change basis, the seasonally adjusted headline and core rates are now 1.5% and 2.2% higher, respectively.
The CPI’s energy price index jumped by 2.9% in September. If we exclude the effects of energy, the CPI would still have been 0.1% higher sequentially in September and was 1.8% higher than a year ago. The CPI excluding food prices would have been 0.3% month-to-month and was 1.7% 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%, medical care by just 0.2% (smallest increase since March) following a strong 1.0% rise, prescription drugs by 0.8%, and motor vehicle insurance also rose by 0.4%—the 11th consecutive monthly increase. Any drag largely came again from communication (-0.8%), apparel (-0.7%), and the seventh consecutive decline in prices for new and used motor vehicles (-0.3%).
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 3.2% annually. This has been an important anchor helping offset any commodity-related decreases in prices.
September’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 was a key 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 remains relatively quiescent. There is a divergence between the Fed’s target measure, the PCE deflator, against the CPI—the difference largely accounted for by the weightings for shelter and medical care. Meanwhile, with regard to inflationary expectations, TIPS yield spreads are still extremely low (likely suffering from some liquidity issues hampering their usefulness as an inflation gauge). According to the University of Michigan’s survey, longer-term inflation expectations, which have no such liquidity issues, are still near the lowest they have been since at least 1990. Despite this, Fed Vice Chairman Stanley Fischer was quite adamant in the Q&A of his speech yesterday that he considers inflation to be essentially at the intended target. When asked about allowing for overshoots on unemployment, which Janet Yellen has suggested the Fed might pursue, Mr. 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.”
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.