A modest 0.1% increase in October for the headline consumer price index (CPI), saw total inflation ebb slightly to 2.0% year-on-year, from 2.2% in September. October’s modest increase is right in line with market expectations.
Energy prices fell 1.0% m/m in October, only partly giving back their hurricane-induced bump-up in August and September. Food prices were unchanged on the month, and are up only 1.3% from twelve months ago.
Core inflation finally gained a step, rising 0.2% in October. That took the year-on-year pace up one tick to 1.8%, after remaining stuck at 1.7% for most of the middle of 2017. The shelter index was a key factor taking core higher, with both rent and owners’ equivalent rent firming 0.3% on the month. Increases in core inflation were widespread. Some examples include medical care (+0.3%), used cars and trucks (+0.7%), tobacco (+1.6%), education (0.3%) and wireless phone services (+0.4%).
Finally, both core goods (0.1% m/m) and core services (0.3% m/m) were rowing in the same direction, taking core inflation higher. Core services are now up 2.7% year-on-year, the fastest pace since February. Core goods prices are still down 1% year-on-year, reflecting past strength in the U.S. dollar.
Key Implications
One would expect that in an economy running at a 3% annualized pace over the past two quarters, and an unemployment rate at a 17-year low, that inflation would show signs of picking up. October’s inflation data is a tentative step in the right direction after a soft patch through much of 2017 worried many at the FOMC.
Today’s report should remove any lingering doubts that the Fed will hike rates in December. From a full-employment standpoint, the argument for rate hikes is strong. But, inflation has been a missing piece for much of the year. Now that it is starting to move into place, we see little to prevent the Fed from moving ahead next month.
