September US CPI inflation

On the face of it, the US consumer price index (CPI) release on 10 October was a disappointment for markets. Of particular note, the year-on-year change in core CPI inflation (which excludes food and energy) was 3.3%, slightly above the 3.2% registered in August, which consensus expected to be repeated.

However, it is always dangerous to place too much emphasis on a single data release and yesterday’s CPI report is a case in point. It is advisable instead to analyse what is driving the data, what are the trends and what is the prognosis.

While core inflation remains firmly above the Fed’s 2% target, there are nonetheless some reasons to feel more optimistic. In particular, it is instructive to look at the shorter-term trends as well as the year-on-year statistics. Doing so reveals much more market-friendly underlying inflation dynamics.

For example, annualising the core CPI data over the past six months shows an inflation rate of 2.6%, down from 4.0% in April this year (see Chart 1). Performing the same exercise for the so-called supercore measures (which shows services excluding food, energy and shelter) gives an identical inflation rate of 2.6%, with an even more dramatic decline from 6.5% in April. Furthermore, on both these measures inflation has declined in each and every month since April.

Chart 1. US CPI inflation (6-month % change, annualised)

Source: Bloomberg, LSEG Data & Analytics and EFGAM calculations. Data as at 10 October 2024.

Looking at these shorter term trends strips out older information and is more reflective of the current inflation environment. On this basis, the underlying dynamics look well on track to see inflation return to target in around 6-12 months’ time.

By itself, this data increases the likelihood of a 25 basis point rate cut when the Fed next meets in early November. It is inconsistent with a rapid decline in inflation, but it suggests that inflation will continue to move gently lower in the months ahead. It should of course be noted that before the Fed’s next meeting there will be a raft of other data that will also feed into their decision and that could swing the vote one way or the other, particularly important when the decision is not so clear cut.