By Greg Lai and Alex Hsiao, Co-Chief Investment Officers
The U.S. Bureau of Labor Statistics (BLS) released September inflation data, and the report was a mixed bag. Headline CPI slowed for the sixth consecutive month, ticking down to 2.4% from 2.5% in August, the lowest reading since February 2021. That’s positive because we’re still making incremental progress toward the Fed’s 2% target, but economists were expecting 2.3%, making September’s print an upside surprise. Likewise, the month-over-month price increase was identical to August’s 0.2% rise and higher than economists’ 0.1% estimate.
Unfortunately, a big chunk of September’s disinflation came from the 4.1% drop in gas prices during the month. Indeed, year-over-year core inflation, stripping out volatile food and energy prices, actually rose from 3.2% in August to 3.3% last month; economists had been expecting core CPI to hold at 3.2% in September. The Fed will be watching shelter costs, in particular, which rose 0.2% month-over-month—better than the 0.5% rate clocked in August, but still too sticky at 4.9% year-over-year, accounting for nearly two-thirds of the increase in core CPI for September.
Consumers feeling the pain
Headed into a contentious November election, it’s worth thinking not just about how the Fed will interpret these numbers but how they feel to households facing them on a day-to-day basis. To that end, data from the University of Michigan released last month showed that most consumers continued to feel the pinch of high prices more viscerally than recent BLS reports might suggest. Especially for lower-income households, whose budgets have been most impacted, 2024 has been marked by a sharp rise in expectations for longer-term price increases (see below).
Sticky CPI looms over next FOMC
Of course, nobody on the FOMC is predicting CPI to hit 9% anytime soon—or, if they are, it’s not something they’re willing to admit on the dot plots we’ve seen. But in all seriousness, the recent stickiness in CPI will obviously factor significantly into discussions over the central bank’s policy move in early November. In fact, the same traders who saw a nearly 35% probability of another 50-bps cut at the next FOMC at the beginning of October are now pricing in better than 1-in-10 odds of no change at November’s Fed meeting and see no chance of another half-point cut.
Disclosure: Reprinted and revised with permission from Rayliant Investment Research in partnership with Affinity Investment Advisors. The article was originally published on October 14, 2024.
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