Consumer prices were softer than markets had expected in September, both in the headline and the core measures. Headline CPI rose a mild 0.1% on the month, CPI excluding food and energy also rose a modest 0.1%.

The modest gains in September saw headline inflation decelerate on a year-over-year basis to 2.3%. The boost to headline inflation from energy prices has started to wane. Energy prices fell 0.5% in September, and are up 4.8% versus a year ago – a sizeable step down from the 12% pace a couple of months ago. In contrast, food inflation remained quite benign, up only 1.4% year-on-year in September.

The modest monthly gain in core prices left the annual pace of core inflation steady to 2.2%. Core inflation has bounced around between 2.1-2.4% since March.

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Underneath the hood in core prices, trends remained the same. Core goods prices fell 0.3% on the month. Prices for new (-0.1%) and used (-3.0%) cars and trucks were both notable contributors to the decline in core prices.

Core services prices rose 0.2%, matching August’s pace. Price pressures for some key services categories ebbed slightly. For example, the indexes for rent and owners’ equivalent rent both rose 0.2% in September, smaller increases than in August. However, services price pressures picked up elsewhere: medical care services (+0.5%), recreation (+0.3%),and airline fares (+1.0%) all saw notable gains.

Key Implications

The September inflation report once again showed that while inflation is simmering away at around a 2% pace, there are few signs that it is starting to boil. Price pressures for core services can best be described as steady. Meanwhile, a strong U.S. dollar and a competitive retail sector are keeping core goods inflation weak. Overall for the third quarter, headline and core inflation  came in a tick lower than we had expected in our recent forecast.

We continue to expect inflationary pressures to pick up slightly over the coming quarters. There is little debate that the labor market is tight, and domestic demand is being buoyed by tax cuts and spending. A strong U.S. dollar is helping to keep a lid on price pressures for many imported goods. This well-behaved inflation backdrop supports our expectation for a continued gradual pace of rate increases, with the next move up likely at the December meeting.

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