October CPI Preview: Inflation Moves Closer to Fed's Target

The Bureau of Labor Statistics will release the US October CPI at 8:30 ET on Tuesday. Bloomberg data shows YoY CPI inflation will fall to 3.3% (vs. 3.7% prior), with annual core inflation remaining at 4.1%. On a month-on-month basis, headline and core CPI inflation may register a 0.1% and 0.3% increase, respectively (vs. 0.4% and 0.3% in September).

■ Core Services: Owners' Equivalent Rent (OER) expected to decelerate

OER inflation (which accounts for 32% of core CPI) unexpectedly accelerated to 0.56% m-o-m in September, marking the highest reading since February. However, the spike in OER inflation appears overstated, and it's not quite likely to continue in October. The details revealed the acceleration in September OER inflation was attributable to a mean-reversion movement in volatile small cities as well as idiosyncratic jumps in a few large metropolitan areas such as Dallas and Los Angeles. However, the sudden jumps in those large cities in September were inconsistent with private local rent data in some cities. Nomura forecasted for October OER inflation is 0.42% m-o-m.

Beyond rents, STR's hotel price data suggest CPI's lodging-away-from-home continued to increase at a steady pace of 1.7% m-o-m in October, following a 3.7% advance in September. Price increases for video streaming services in October by many providers pose an upside risk to CPI's "cable and satellite television and radio" component, which accounts for 0.9% of headline CPI and 1.1% of core CPI.

Barclays expected a modest firming in transportation services costs amid slightly higher inflation in categories such as motor vehicle insurance and fees. On the other hand, the investment bank expected modest deflation in October airfares.

■ Core Goods: more deflation driven by used car prices

The major car producers had sufficient inventories ahead of the UAW strike, which helped mitigate outsized production losses, and therefore price pressures. By assessing retail vehicle sales based on observed changes in advertised units tracked by vAuto, used-vehicle retail sales in October were down 2% compared to September, and the year-over-year comparison with 2022 worsened again. Used retail sales are estimated to be down 4% year over year in October. The average retail listing price for a used vehicle declined 0.7% over the last four weeks.

■ Energy prices are expected to be a modest drag on October CPI inflation.

Retail gasoline prices fell by slightly more than 5.0% m/m, which translates to about a 4.8% m/m decline, after the seasonal adjustment, following a 2.2% increase in September. Economists look for an increase in natural gas (piped gas) and electricity costs.

Taken together, energy is likely to deduct 0.15pp from October CPI % m/m versus a 0.08pp boost in September.

■ Food inflation slowed slightly from the recent run-rate

FAO’s index showed food prices edged lower in October, continuing the downward trend and standing 10.9% percent below its corresponding value a year ago.The slight drop in October reflects declines in the price indices for sugar, cereals, vegetable oils and meat, while the index for dairy products rebounded.

■ Beyond October, disinflation is expected to continue gradually

In subsequent months, core CPI inflation is still likely to moderate gradually. Tighter credit conditions for auto loans and the end of the UAW strike suggest a resumption of decline in vehicle prices, and rent disinflation will likely continue. Still, supercore components may remain sticky for some time, partly depending on momentum for personal consumption and wage growth.

According to an article by Capital Group economist Jared Franz, the much-anticipated 2% inflation target may be achieved early due to the lag in rents. He also noted that improved productivity and slowing unit labor costs place downward pressure on inflation. Combined with stable commodity prices, Franz believes inflation could hit 2% by the end of 2024. That's earlier than the Fed's median forecast of headline inflation at 2.5% and core inflation at 2.6%.

Alleviating inflationary pressures may further reduce the likelihood of the Fed raising interest rates, but the Fed is expected to maintain its hawkish bias until inflation reaches its target range.

■ Appendix: CPI Estimate