US: Core Inflation Continues to Drift Lower, giving policymakers enough breathing room to remain on pause at November meeting

Core inflation continues to drift lower, giving policymakers enough breathing room to remain on pause at November meeting

The Consumer Price Index (CPI) rose 0.4% month-on-month in September, marking a deceleration from August’s 0.6% m/m gain, and coming in a tick above the consensus forecast. On a twelve-month basis, headline inflation held steady at 3.7% .

• Energy prices rose 1.5% m/m, largely driven by a further increase in gasoline prices (+2.1% m/m). Food prices rose 0.2% m/m – matching August’s monthly gain – as prices for ‘food away from home’ accelerated (to 0.4% m/m from 0.3% m/m), while prices for ‘food at home’ (0.1% m/m from 0.2% m/m) slowed.

Excluding the direct effects of food & energy, core inflation rose 0.3% m/m – matching August’s gain. The twelve-month change continued to edge lower – falling 0.2 percentage points to 4.1% – though the truncated three-month annualized change rose to 3.1% (from 2.4% in August).

Price growth across services accelerated 0.6% m/m (from 0.4% m/m in August), which was the strongest monthly gain since February 2023.

• Shelter costs were a key factor pushing overall service costs higher, driven primarily by an acceleration in owners’ equivalent rent (rising by 0.6% m/m from 0.4% m/m in August). Meanwhile, rent of primary residence (+0.5% m/m) matched August’s gain.
• Non-housing services (aka the CPI measure of ‘supercore’) also accelerated last month, rising 0.6% m/m (from 0.4% m/m in August), pushing the twelve-month change to a six-month high of 4.6%.

Goods prices remained in deflationary territory for the fourth consecutive month, falling 0.4% m/m. Used vehicle prices (-2.5% m/m) accounted for the bulk of the pullback, though apparel (-0.8% m/m) and medical commodities (-0.3% m/m) also saw a small pullback in price growth.

Key Implications

The September CPI reading delivered few surprises, with the core measure coming in bang-on expectations, and headline just a tick higher. While the monthly price gains for core inflation have firmed in August/September (+0.3% m/m) relative to the July/August (+0.2% m/m) readings, the underlying trend on core remains favorable. The twelve-month change now sits at a two-year low while the more recent three-month annualized trend is running at an even softer 3.1%.

That said, there’s still a lot of ground to cover before returning inflation to 2% and given the continued resilience of the labor market, there’s plenty of opportunity for progress to stall over the coming months. The recent tightening in financial conditions will likely give policymakers enough breathing room to hold rates steady at its next interest rate announcement on November 1st. But unless the labor market shows clear evidence of cooling over the coming months, another rate hike later this year seems very likely.