The US headline inflation rate remained unchanged at 3.7% year-on-year (YoY) in September, slightly higher than expected. Core inflation, net of energy and food, fell to 4.1% from 4.3% (YoY), in line with expectations and to the lowest reading in two years (see Chart 1).
Investment Insights • MFN
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US inflation easing continued in September
US inflation data for September confirmed the downward trend in core prices, reducing the risk of an increase in interest rates at the next Federal Open Market Committee meeting on 01 November. However, inflation remained high due to housing and energy prices. In this Macro Flash Note, senior economist GianLuigi Mandruzzato looks at the factors that will drive consumer prices in the coming months.
Chart 1. US inflation rates (YoY)
Source: LSEG Data &Analytics and EFGAM calculations. Data as at 12 October 2023.
Compared to August, the headline CPI rose by 0.4% and the core index by 0.3% (see Chart 2). Housing and energy CPI together were responsible for more than 90% of the overall increase in headline CPI. The housing CPI rose 0.6% month-on-month (MoM) and explains more than half of the overall monthly increase. The energy CPI increased 1.5% MoM, driven by the price of gasoline, and added 0.1% to the total CPI.
Chart 2. Contributions to US CPI inflation (MoM)
Source: LSEG Data & Analytics and EFGAM calculations. Data as at 12 October 2023.
However, it should be noted that the housing CPI continues to moderate, reflecting the trend in real estate rents and prices. As for fuels, the prices of futures contracts on gasoline have been declining since the end of July and retail gasoline prices have fallen in recent weeks, suggesting energy prices will contribute negatively to October CPI. Taken together, these trends will encourage further declines in inflation in the coming months.
The Federal Reserve places particular emphasis on core inflation and in recent months it has focused on prices of services excluding housing and energy services, a component now referred to as supercore.1 In September, the signal from the supercore CPI was ambiguous. Its change over twelve months slowed to 3.7%, the smallest increase since the beginning of 2022. However, the August monthly increase was 0.5%, the same as in July, boosting the 3-month annualised change to 5%.
The other component of the core CPI, the prices of goods excluding energy and food, fell in absolute terms for the fourth consecutive month. Compared to twelve months earlier, the prices of core goods are unchanged and have returned to the trend prior to the pandemic which saw them basically stable for twenty years. In fact, core CPI inflation net of shelter CPI has returned to below 2% YoY (see Chart 1).
In conclusion, the September data confirmed the declining trend in underlying US inflation but also show that the return towards the Fed’s 2% target will not be a linear process.2 In this context, it seems likely that the central bank will confirm the current level of fed funds rates at the FOMC meeting on 01 November.
1 Fed Chairman Powell first referred to this aggregate in November 2022 (see Inflation and the Labor Market). Powell said that ”[h]ousing services inflation measures the rise in the price of all rents and the rise in the rental-equivalent cost of owner-occupied housing." Accordingly, the supercore CPI is measured subtracting from the services ex energy CPI the whole of shelter CPI, which includes rent of primary residence, lodging away from home, owners’ equivalent rent of residences, and tenants’ and household insurance.
2 The Federal Reserve targets a 2% increase in the PCE deflator.