US CPI numbers not enough to persuade the FOMC to hike rates again

The overshoot in headline US CPI today was largely expected. It had already been flagged by the preceding PPI numbers and was primarily the result of higher food, energy and shelter costs. This upwards pressure on prices is not expected to persist – indeed energy prices are already moving lower again – and as such today’s higher print should not be seen as an uptick in overall inflationary pressures but rather just month to month ‘noise’. This ‘noise’ argument is given further weight by the fact that the increase in shelter costs is at odds with the trend being seen in the Zillow index, a private sector measurement of rents that is continuing to show prices falling. The two series don’t track each other perfectly, but the large fall seen in the Zillow numbers suggests that the CPI shelter costs component will be heading lower too, going forward. Overall, the downtrend in pricing pressures remains in place.

The more important take-away is that core inflation continues to fall, the annual rate slipping to 4.1% from 4.4%. However, the fact that the monthly reading remained unchanged at 0.3% will be disappointing to the Fed, as a monthly reading of 0.2% is required if its CPI target is going to be reached. And the outlook for Q4 is already looking a little more difficult, given rises being seen in healthcare and hospital services costs plus a slower pace of decline in used car prices. But the direction of travel remains lower, and as we move into 2024 so the pace of decline looks set to pick-up again.

For the Fed, there is probably not enough in today’s report alone to suggest that it needs to be tightening policy again in November. But it will see it as justifying its message that policy needs to remain “tighter for longer”, with the prospect of another rate rise being kept on the table.