U.S. Oct. Consumer Prices Offer Mixed Signals on Inflation
An underlying measure of U.S. consumer prices picked up in October while trailing forecasts on an annual basis, offering mixed signs on inflation that will weigh on Federal Reserve discussions over the path of interest-rate increases.
Excluding food and energy, the core consumer-price index rose 0.2 per cent from the prior month, according to a Labor Department report Wednesday, the fastest gain in three months and in line with projections. The gauge rose 2.1 per cent from October 2017, slightly short of the median estimate of economists for a 2.2 per cent increase, which was also the gain in September.
Inflation is gradually gaining traction, with help from solid household demand and a tight job market, while the tariff war with China may further boost price pressures. At the same time, some of the latest advance reflected quirks such as a rebound in used-car prices, and the figures may potentially be seen as validating a recent decline in inflation expectations in financial markets, amid tumbles in crude oil and equities.
“These are pretty steady inflation prints,” with “nothing in here that argues inflation is going to overshoot,” said Omair Sharif, senior U.S. economist at Societe Generale. Also, there’s little to concern policy makers, so they’ll “continue to stay gradual” with interest-rate hikes, he said.
The biggest gain in energy prices since January boosted the broader consumer-price index, which rose 0.3 per cent in October, matching estimates and following a 0.1 per cent gain the prior month. It was up 2.5 per cent from a year earlier, also in line with forecasts. The CPI report showed gasoline prices rose 3 per cent from the prior month on a seasonally adjusted basis.
Investors expect the Fed to go ahead in December with this year’s fourth interest-rate hike, and policy makers see several more increases in 2019. While the Fed’s preferred gauge of inflation is a separate measure related to consumption, those October figures will be released on Nov. 29, making the CPI a key report at this time.
Policy makers and economists look at core inflation as a better indicator of underlying trends because the broader figures are subject to bigger swings from energy prices.
The Fed-preferred index and its core gauge both rose 2 per cent in September from a year earlier; those measures tend to run slightly below the Labor Department’s CPI. Fed Chairman Jerome Powell’s speech on the economy Wednesday evening in Dallas may offer more clues on inflation and the path of interest rates.
Based on Wednesday’s numbers, Morgan Stanley projected the Fed’s preferred core price gauge cooled to a 1.8 per cent annual gain in October.
The October advance in the CPI benefited from some bounce-back from September: used-car prices rose 2.6 per cent, the most since 2009, after posting the biggest monthly drop in 15 years. The measure has been volatile since the Labor Department changed its methodology earlier in 2018.
New car prices, by contrast, weighed on inflation in October, falling 0.2 per cent from the prior month, the biggest drop since April. Price gauges for communication, recreation and personal care also declined. Meanwhile, categories showing relatively slow increases included shelter, up 0.2 per cent, while apparel costs rose 0.1 per cent.
The latest report brought the core CPI’s three-month annualized increase to 1.6 per cent, the slowest pace in more than a year.
A separate report released Wednesday by the Labor Department showed inflation-adjusted hourly earnings fell 0.1 per cent in October from the prior month. They were up 0.7 per cent from a year earlier.
While the impact of tariffs is yet to show up in a big way in the CPI figures, economists say that may change as 10 per cent tariffs on $200 billion of Chinese imports are due to rise to 25 per cent in January in the absence of a breakthrough in negotiations. The Trump administration has also threatened to escalate tariffs to cover all imports from China.
Get MoreEnergy prices rose 2.4 per cent from the previous month, while food costs fell 0.1 per cent. Expenses for medical care rose 0.2 per cent; these readings often vary from results for this category within the Fed’s preferred measure of inflation due to different methodologies. The CPI is the broadest of three price gauges from the Labor Department because it includes all goods and services. About 60 per cent of the index covers the prices that consumers pay for services ranging from medical visits to airline fares, movie tickets and rents.