- Headline inflation rose a sturdy 0.4% on the month in October, boosted by a 2.7% (m/m) jump in energy prices. The stronger reading lifted the year-on-year pace to 1.8%, up from 1.7% in September.
- Core prices rose 0.2% (m/m), in line with market expectations. The core inflation rate versus a year ago slowed slightly from September to 2.3%.
- Core goods prices declined (-0.1%) for the second consecutive month. Big declines in prices for apparel (-1.8% m/m) and personal computers (-2.4%, m/m) were the main drivers of the drop. Overall, core goods prices were up 0.3% versus than a year ago after a period of steady deflation through much of 2013-2018.
- In contrast, core services inflation was up 3.0% versus a year ago, up a tick from September.
- Delving into the nitty gritty, medical care prices jumped up 1.0% in October, their strongest jump in three years, on higher hospital services costs. The index for prescription drugs also jumped 1.8% on the month, but is only up 1.0% versus a year ago. Price indexes for recreation (+0.7%) and used cars & trucks (+1.3%) also had hefty increases after declines in September.
- Prices for shelter, which make up a third of the consumer basket, rose 0.1% in October, a bit cooler than in recent months. Prices were held back by a 3.8% drop in lodging away from home, and only a modest 0.1% increase for rent – the smallest increase since 2011.
Key Implications
- In general, all seems quiet on the inflation front. Core inflation remained quite contained, which is consistent with an economy where growth has slowed in the second half of the year, and certain sectors need to work off higher than normal levels of inventory (apparel). Despite tariffs coming into effect on many imported consumer goods from China in September, core goods inflation remained tame. Services prices are keeping inflation on target, but do not show signs of further acceleration.
- This well-behaved pattern is expected to continue in the coming quarters. This will provide ample justification for the Fed to take a prolonged pause on interest rates, as it assesses the impact of this year’s rate cuts on the economy, whether global demand is showing signs of improvement, and how China-U.S. trade relations unfold.
