The core consumer price index showed price pressures eased slightly in September, but services prices came in hot. The Federal Reserve has welcomed disinflationary reports over the last three months, but this month's report doesn't appear to extend the trend. The S&P 500 treaded water all morning, then turned solidly lower on Thursday afternoon as the 10-year Treasury yield marched higher following the CPI and jobless claims data.
CPI Inflation Report Hits And Misses
The overall consumer price index rose 0.4% on the month, above 0.3% forecasts. The 12-month CPI inflation rate held at 3.7%. Economists had expected the inflation rate to dip to 3.6%.
The core CPI, which strips out volatile food and energy prices, rose 0.3% vs. August levels, matching forecasts. However, the annual core inflation rate eased to 4.1% from 4.3% in August, undercutting estimates of 4.2%. The core CPI inflation rate peaked at a 40-year-high 6.6% in September 2022.
Core goods prices fell 0.4% on the month. Over the past 12 months, core goods prices are now unchanged, down from a 0.2% rise in August. Core services prices jumped 0.6% from August, while the 12-month change eased to 5.7% from 5.9% the prior month.
Fed Chair Jerome Powell has said that the most important category of spending for the inflation outlook is core nonhousing services, reported with the Commerce Department's late-month personal income and outlays data. Wall Street looks to the CPI gauge of services less rent of shelter as a reasonably close proxy, though it has serious shortcomings.
September's CPI report showed services less rent of shelter prices rose a strong 0.6% on the month after rising 0.5% in August. Core services inflation excluding housing eased to 2.8% from 3.1% in August. The underlying trend may be slightly worse because the monthly data show a 3.5% drop in health insurance prices. But the CPI report's methodology reflects health insurer profits from the previous year. That doesn't yield a timely, useful data point.
CPI Report Details
Energy prices rose 1.5% on the month, following August's 5.6% gain, but that could begin to reverse next month.
Prices for food served at home rose just 0.1% vs. August. The 12-month inflation rate eased to 2.4%.
However, food away from home prices, which tend to be more affected by labor costs, rose 0.4% on the month and 6% from a year ago.
The CPI report showed used car prices falling 2.5% on the month and 8% from a year ago. New vehicle prices rose 0.3% on the month and 2.5% from a year ago.
Apparel prices fell 0.8% and are now up 2.3% from a year ago.
Transportation services prices rose 0.7% on the month, while the the annual increase eased to 9.1%.
Prices for shelter rose 0.6% from August and 5.7% from September 2022. The monthly gain was fueled by a 4.2% jump in hotel and motel prices.
Jobless Claims
Initial claims for jobless benefits held at 209,000 in the week through Oct. 7, after the prior week's data was revised up by 2,000. The four-week average of claims fell 3,000 to 206,250.
However, ongoing jobless claims rose 30,000 to 1.702 million in the week through Sept. 30. The implication is that layoffs are low, but hiring has softened.
CPI Vs. PCE Price Index
In August, the core CPI rose 0.3%, but the core PCE price index, which the Fed pays more attention to, rose just 0.1%. But we're probably not in for a repeat this month. Ian Shepherdson, chief economist at Pantheon Macroeconomics, expects a 0.27% rise in the core PCE price index for September, based on CPI and PPI data.
Unlike the core CPI, the core PCE price index includes food services, which rose 0.4% in September. That will be offset by other variations between the CPI and PCE.
Housing accounts for about 42% of the core CPI but just 17% of the core PCE price index. That exacerbates the shortcomings of the government's methodology for tracking rents, which doesn't fully reflect changes in market prices for about a year. In August, the CPI showed shelter costs up 7.25% from a year ago, while Zillow's rent index rose just 3.25%.
Some key inputs for the core PCE inflation report at month's end came out with Wednesday's producer price index, providing some good news for the Fed's primary inflation rate. The PPI's measure of health care services inflation feeds directly into PCE data. PCE health care data includes government payments, not just what consumers pay out of pocket.
In September, health care services prices rose just 0.1%, unadjusted for seasonal effects. By contrast, CPI medical services prices rose 0.3% on the month. That includes a 1.5% monthly jump in hospital services prices, the largest since August 2016.
Also, the PPI is the source of PCE data on airfares, which is based on the average price per mile traveled paid by passengers. The CPI airfare measure is based on prices for a sample of routes. Recently, the two measures have diverged significantly, with the PPI measure running hotter than the CPI's, but that might be shifting. In September, the PPI reading for airline services fell 2.1%, seasonally adjusted, while CPI airfares rose 0.3%.
Portfolio management fees, another key input for core PCE inflation, also was previewed by the PPI. After gains of 7.2% in July and 1.9% in August, fees fell 0.5% in September. Portfolio management fees had surged in July, as the stock market hit its high for the year, then moderated in August. But fees fell in September, when the S&P 500 had its worst month of the year.
Fed Policy Impact
Ahead of the CPI report, markets were pricing in just 9% odds of a quarter-point Fed rate hike on Nov. 1 and 28% odds of a hike by the subsequent policy update on Dec. 13. After the CPI report, the odds of a Nov. 1 hike rose to 11%, while odds rose to 38% for a move by Dec. 13.
Markets had downgraded chances of another hike as a couple of hawkish Fed members indicated they're reassessing the need for further rate hikes, since the rise in the 10-year Treasury yield is helping to slow growth.
Federal Reserve chair Jerome Powell has said that he wants to see six months of tame inflation data before policymakers will gain confidence in the current trend. We've got three tame months under the belt through August. A few more months would have meant a quicker shift to rate cuts next year, but September's CPI is a setback for those hopes.
The CPI report underscores what the Fed has been saying: Until the economy slows, higher inflation will be a risk. Still, there's good reason to think a consumer slowdown is beginning and that prices should soon follow.
For example, Shepherdson notes that the jump in hotel rates is "unlikely to be repeated, given falling occupancy rates."
S&P 500 Reaction To CPI Report
After the CPI report, the S&P 500 fell 0.8% in afternoon stock market action. The 10-year Treasury yield climbed 11 basis points to 4.71%.
On Wednesday, the S&P 500 made a late-day run to finish up 0.4% for a fourth-straight gain. The S&P 500 was closing in on its 50-day moving average, having traded south of the key technical level since Sept. 15.
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