Highlights:

  • All items CPI rose a smaller-than-expected 0.1% in September following a 0.2% gain in August.
  • With food and energy prices coming in as expected, +0.1% and –0.5%, respectively, the downward surprise was concentrated in a 0.1% gain in core prices which compared to an expected gain of 0.2%.
  • The CPI annual increase dropped to 2.3% from 2.7% in August while the core measure held steady at 2.2%.

Our Take:

The September CPI report showed a weaker-than-expected increase of only 0.1% down from the 0.2% increase in August and expectations that today’s report would match the 0.2% gain. Energy prices dropped 0.5% with food and beverage prices rising 0.1%. Those were generally in line with expectations. The downward surprise was concentrated in the core, or ex food and energy, measure which rose 0.1%. That matched August’s monthly gain but was down from the 0.2% expected going into the report. The bounceback in core inflation had been premised on a reversal of some overstated weakness in apparel and medical care services which did occur in the September report. However the recovery in these prices was offset by greater weakness elsewhere led by used car prices plummeting 3.0% in the month.

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The modest monthly drop in energy prices was in contrast to an almost 5% monthly increase a year ago. With that sizeable increase dropping out of the year-over-year calculation, the annual increase in inflation dropped to 2.3% in September from August’s rate of 2.7%. The annual increase in core inflation held steady at 2.2% which helped ease concern about the inflationary consequences of an economy operating beyond capacity given the report last week that the September unemployment rate dropped further to 3.7% and thus further away from the Fed’s view of equilibrium unemployment being in a range of 4.3% to 4.6%. Our expectation is that today’s report will not prevent the Fed from tightening further but will keep the pace gradual. Our forecast assumes that the upper end of the Fed’s target range rises from a current 2.25% to 2.50% the end of this year and to 3.50% by the end of 2019.

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