Bumpy path for inflation

Fed expected to pause after December. 

The consumer price index (CPI) rose 0.2% in October, the same as September. That pushes the year-on-year measure to 2.6%, up 0.2% from last month and in line with market expectations.  

Food prices accelerated, especially at the grocery store. Agriculture hit hard by hurricanes in Florida, including oranges, drove those gains. Food prices away from home moderated but are still rising much faster than pre-pandemic, despite the re-introduction of value meals at many fast-food restaurants. 

Prices at the gas pump and other energy prices continued to fall. The real problem is prices compared to pre-pandemic levels. All refined gasolines averaged $3.19 per gallon in October, still about one-third higher than they were in February 2020. Cumulative price hikes were the number one issue for voters in November.  

Core CPI, which excludes the volatile food and energy categories, rose 0.3% in October, the same as September. The core index held at a 3.3% gain from a year ago in October, also the same as September. That is more welcome news for the Federal Reserve, as tight credit conditions are also suppressing demand and prompting some discounts. Food and energy costs are more at the mercy of the external shocks such as storms. 

The price of durable goods moderated and rose only 0.1%, after shooting up 1.0% last month on higher tire prices. Big-ticket durable goods prices are still in the red by 2.5%. They are now falling in price more rapidly from a year ago than pre-pandemic, helped in part by the strong dollar. The dollar has strengthened further in recent weeks as traders fear a surge in tariffs. The new administration has said that it would like to depreciate the dollar to subsidize exports; that is a difficult task short of a major policy misstep that could erode the dollar’s status as the world’s reserve currency. 

Nondurable goods excluding food fell for the second consecutive month both on a month-to-month basis and from a year ago. That is good news for the holiday season. This is the fastest decline on a year-over-year basis going into the holiday season since Fall  2020 when the Delta wave of COVID was gaining momentum. The economy nearly slipped into a double-dip recession four years ago when employment slipped back into the red in December that year.  

Shelter costs rose 0.4% in October, off only 0.1% from the pace of September. Apartment rents moderated slightly as lease renewals picked up, while owners’ equivalent rent edged up slightly. Both have moderated significantly on a year-over-year basis. Hotel room rates picked up slightly as evacuations rose in response to Hurricane Milton.  

The super core services measure of the index, which strips out shelter costs, rose 0.4% in October. That is 0.2% slower than September and a key measure for the Federal Reserve because it is where officials fear inflation will be the stickiest. That measure moved up 0.1% to 4.5% but it is buoyed by a sharp improvement one year ago. Those figures should moderate as we move into early 2025 when year-on-year comparisons become easier. 

The factors holding service sector prices up in October included airfares, personal services and motor vehicle maintenance and repairs. Admissions to sporting events moderated after surging the previous month. They are still up almost 7% from a year ago.  

Other measures of inflation that the Fed watches are mixed. The Cleveland and Atlanta Federal Reserve Banks’ measures all slowed from a year ago but rose slightly on a monthly and three-month moving average basis. We still think the Fed will cut rates at the December meeting by a quarter point. 

The Fed does not front-run policy shifts.

Bottom Line  

The path down on inflation is going to be bumpy but the details on this inflation report suggest that our forecast for another rate cut in December holds. Thereafter, the Fed expects to pause a bit until it gets confirmation that inflation is continuing to abate. The inflationary proposals from the new administration are not yet law. The Fed does not front-run policy shifts. It waits and reacts after implementation. The challenge for the Fed and the new administration is that the economy appears to be much more prone to bouts of inflation than it was pre-pandemic.