Oct 12, 2023 - Economy

Bringing down inflation is proving to be tougher than expected

Data: Bureau of Labor Statistics; Chart: Axios Visuals
Data: Bureau of Labor Statistics; Chart: Axios Visuals

Nobody ever said getting inflation down from its recent highs of 9% to something more tolerable would be easy. September's Consumer Price Index, reported Thursday morning, confirms that this particular dragon still has some life left in it.

Driving the news: The Consumer Price Index rose 0.4% in September, a tick higher than analysts had expected. Core CPI, excluding food and energy, was up 0.3%.

  • Year-on-year inflation was stable at 3.7%, while core inflation fell to 4.1%, from 4.3%.

Why it matters: While the latest numbers are a far cry from the super-high inflation seen in 2022, they indicate that bringing price pressures down is not as rapid or smooth as it appeared over the summer.

  • For example, core CPI rose 0.2% in June and July, versus 0.3% in both August and September.
  • A month ago, we noted that core CPI had risen at a 2.4% annual rate over the preceding three months, broadly consistent with the Fed's 2% target. But the three-month number rebounded in September and is now back up to 3.1%.

The details: A key culprit in persistent inflation has been shelter costs, which rose 0.6% in September. In part, that reflected a 4.2% surge in hotel prices, itself a retracing of an unusually steep drop in August.

  • The report also showed a 0.6% rise in rents, which appears on track to fall in coming months based on real-time private sector measures of the rental markets.

Yes, but: Even if rent price growth recedes as anticipated, prices for services excluding rent have accelerated over the last three months, up 0.2% in July — then up 0.5% in August and 0.6% in September.

  • And while policymakers prefer to look through energy price swings, the surge in oil prices over the summer could still be filtering through to other prices, like airfares and shipping costs.
  • Oil prices have been broadly in retreat in October, though conflict in the Middle East could change that.

What they're saying: "This report showed less progress on inflation than was hoped for," said Richard de Chazal, a macro analyst at William Blair, in a note.

  • It "is consistent with the view that the last mile on inflation to the Fed's 2% target will be on a bumpier path, where progress is much slower than the initial retrenchment from 9% last year to today," de Chazal said.

The new data was hardly a five-alarm fire type of report and is unlikely to force some major readjustment in the Fed's policy course in the near term. But it may shift the odds around what comes next.

State of play: The central bank appears likely to leave interest rates unchanged for the second straight meeting when it convenes at the end of this month, particularly in light of a run-up in longer-term bond yields in recent weeks.

  • Less certain is whether it will raise interest rates one more time at the final meeting of the year in mid-December. At the margins, the September CPI data tilts the odds toward one more hike.
  • But there will be two more rounds of monthly employment and inflation data before then — and, of course, two more months' worth of developments in financial markets and geopolitics.

By the numbers: The yield on two-year Treasury securities rose to 5.08% Thursday morning, from 5%, reflecting somewhat higher odds of another rate hike.

Of note: This is the second straight major data release that has come in on the hot side, coming six days after blockbuster job growth was reported for September.

  • While each can be explained away or minimized in isolation, both suggest an undercurrent of strength in the data. If sustained, it may empower the monetary hawks on the Fed's policy committee.

The bottom line: "Coming on the heels of last week's surprisingly robust employment data, inflation data that remains above a comfortably sustainable pace could make the case for some Fed policymakers that more needs to be done to bring the economy back into balance," said Jim Baird of Plante Moran Financial Advisors, in a note.

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