October Inflation in Line With Expectations

The BLS released October’s inflation data this morning and there were no major surprises. The Consumer Price Index for All Urban Consumers (CPI-U) climbed  a seasonally adjusted 0.2% in October following a decline of 0.2% in September. This is in line with consensus expectations. Year over year, the CPI-U was up 0.2% at the end of October, which is well below the Fed’s annual inflation target rate of 2%. According to a recent Federal Reserve press release:

“Inflation has continued to run below the Committee’s longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports.”

Core inflation, which excludes food and energy, increased 0.2% in October, following a 0.2% increase in September. For the year ending in October, core inflation was 1.9%. Outside of the volatile energy index, which was down over 17% for the 12-months ending in October, consumer prices appear to be climbing at a steady pace only marginally below the Fed’s target.

October’s Seasonally Adjusted Inflation

October’s 0.2% climb in consumer prices was largely driven by modest increases in the energy index, which rose 0.3% following a decline of 4.7% in September. Gas prices were up 0.4% in October compared to a 9% decline in September (this still leaves gas prices down 27.8% year over year).

A 0.8% spike in the index for medical care services also helped drive October’s inflation. This includes a significant jump in the hospital services index, up 2% in October. Overall, medical care costs posted a 0.7% gain in October including a 2.3% jump in the costs of inpatient services and a 1.7% rise in the costs of outpatient services.

Four of the six major grocery store food groups saw prices rise in October. The overall food index rose a modest 0.1%, following a 0.4% rise in September. The price of fruits and vegetables climbed 0.5% in October, while the index for meat, poultry, fish and eggs fell by the same amount, despite a 3.4% increase in the cost of bacon and bacon related products. A fall of 4.8% in the price of eggs was particularly notable for the month. Breakfast cereal and butter posted strong price gains, rising 2.4% and 5.3% in October.

Shelter costs continued to climb steadily, up 0.3% in October, matching Septembers change.  Shelter costs have risen between 0.2% and 0.4% every month this year. The index for lodging away from home, up 0.8% in October, contributed significantly to higher shelter costs, .

The apparel index was down 0.8% in October. There was a large amount of variation within the index. The index for boys apparel climbed 2.9% while the index for girls apparel fell by 2.9%. Delivery services also fell in October, down 2%.

Seasonally Adjusted Monthly % Change in CPI-U by Category (2016)

All Items0-
Fuel Oil (non seasonally adjusted)-6.5-
Utilities (piped gas service)-0.61.0-
Energy Services-
All Items Less Food and Energy0.
Services Less Energy Services0.
Transportation Services0.
Medical Care Services0.

12-Month Inflation

For the 12-months ending in October, unadjusted inflation was 0.2%. This includes a 27.8% decline in the index for energy commodities, which accounts for roughly 3.8% of the total CPI-U. The overall energy index fell 17.1% for the year. Despite the strong negative impact of energy prices, the CPI-U is marginally higher for the year.

Food prices, which account for over 14% of the overall price index, were up 1.6% year over year. Annual changes in food prices were mixed. Eggs were 30% more expensive than they were one year earlier. Over the same period, milk became 7.5% cheaper and the index for salt and seasoning rose 7.0%. Food at employee sites and schools was 5% higher for the year.

The prices of many consumer goods became cheaper over the year. The indexes for apparel and for appliances posted 1.9% and 4% declines respectively. The price of a television set has fallen 13.3% year over year, while the index for toys was down 6%. On the other hand, the cost of shelter rose 3.2% for the year with moving costs up 6.4%.

Outlook for the Fed

Most economists expect the Fed to raise interest rates in December, which would be the first rate hike in over 9 years. Today’s inflation release should not have a significant impact on these expectations. Fed fund futures are pricing in a 73.6% likelihood of a 0.25% rate hike on December 16th, which would bring the Fed Funds rate to 0.5%. The level of uncertainty around this highly anticipated hike and the pace of tightening over the coming years is unprecedented.

The modest but steady growth in the U.S. economy is in stark contrast to slowdowns in much of the world. With the EU considering quantitative easing and Japan dipping into recession, international money is flowing into the U.S. economy, driving the dollar higher. A rate hike would put further upward pressure on the U.S. dollar, which would create a slowdown in domestic manufacturing. It would also make imports cheaper, potentially keeping inflation from moving towards the target rate. The graph below shows the U.S. dollar reaching its highest level in 10 years versus a basket of international currencies. This should be a major concern at the next FOMC meeting on December 15th and 16th.

Screen Shot 2015-11-17 at 8.49.13 AM

Annual Inflation Flat as Consumer Prices Decline in September

Falling gas prices kept inflation below zero for the  month of August. The BLS announced this morning that the Consumer Price Index for All Urban Consumers (CPI-U) fell 0.2% in September on a seasonally adjusted basis; this is in line with expectations. In August, the CPI-U fell 0.1% following 6 straight months of growth. Gas prices also drove the decline in August’s CPI-U number. September’s decline wiped out the annual gains of 0.2% that were posted at the end of August, leaving the CPI-U flat for the year ending in September.

Screen Shot 2015-10-15 at 8.36.20 AM

The index for all items less food and energy was up 0.2% in September, following increases of 0.1% in both July and August. For the 12-months ending in September, this core index increased 1.9%, pointing to more robust underlying growth for the U.S. economy. This is the highest annual core inflation number since July 2014. As the graph above shows, the disparity between overall consumer prices and consumer prices less food and energy continues to grow.

Energy Prices

The decline in overall consumer prices in September was largely driven by falling gasoline prices, which were down a seasonally adjusted 9% in the month alone.  Over the same period, the energy index fell 4.7%, adding to August’s 2% decline. The energy index accounts for about 8% of the CPI-U and gasoline about 4%.

Volatile gasoline and energy prices have driven overall price levels and kept inflation very low over the past year. The energy index is down 9.7% for the year ending in September. Over this period, the biggest price declines were seen in the price of gasoline and fuel oil, down 18% and 18.6% respectively.

Seasonally Adjusted Monthly Numbers

On a seasonally adjusted basis, the CPI fell 0.2% in September following a decline of 0.1% in August.

Seasonally Adjusted Monthly % Change in CPI-U by Category (2016)

All Items0-
Fuel Oil (non seasonally adjusted)-6.5-
Utilities (piped gas service)-0.61.0-
Energy Services-
All Items Less Food and Energy0.
Services Less Energy Services0.
Transportation Services0.
Medical Care Services0.

The price of food climbed 0.4% in September, adding to August’s 0.2% increase in the food index. Higher prices for dairy and fruits and vegetables, including a 4.7% spike in the price of lettuce, were somewhat offset by declines in the prices for fish and poultry. The index that measures the price of food in primary and secondary schools was 7.2% higher in September alone.

The shelter index continues to climb, up 0.3% in September, following increases of between 0.2% and 0.4% per month since the beginning of the year. In September, higher shelter costs were the result of higher prices for hotels and lodging away from home. The rent index, which is part of the shelter index, climbed 0.4% in September. Shelter costs account for about one third of the CPI-U.

The medical care index was up 0.2% in September, including increases of 0.3% for medical care services and 0.6% for health insurance. At the same time, the costs for both prescription drugs and medical equipment and supplies were down 0.2%.

Following four months of declines, the index for household furnishings and operations increased 0.4% in September despite a fall of 0.7% in the price of floor coverings. Indoor plants and flowers were significantly more expensive, gaining 2.4% in September.

The index for apparel fell 0.3% in September, following two months of gains. September’s apparel number masks volatility within the index. On a seasonally adjusted basis, the prices for men’s outerwear fell 3.9% and girl’s apparel was down 3.7%. At the same time, the price of men’s sweaters climbed 8.7%.

Annual Inflation

September’s declining CPI-U wiped out any 12-month gains, leaving overall price levels flat for the year. Higher prices for most components of the index were just able to balance the 12-month 18.4% decline in energy prices. The food index was 1.6% higher for the 12-month period and Shelter costs climbed 3.7%. Transportation services were 2.2% higher, including increases of over 5% for both car and truck rentals and vehicle insurance. Significant 12-month price hikes were also posted for animal services including veterinary services (up 4.3%), admission to sporting events (up 7.8%) and childcare and nursery school fees (up 4.2%). In general, higher prices were recorded for most services. Financial service costs were nearly 4% higher for the year, including an increase of 5.1% for tax and accounting services.

Price declines over the past year include the cost of cell phone services (down 3.8%) and the index for cell phone hardware, calculators and consumer information items, which tumbled 15.8%. Airline fares were down 6% for the year as was the price of toys. Television sets became over 13% less expensive compared to a year earlier and the price of appliances in general fell 3.5%.

Economic Outlook

Today’s inflation numbers will be watched closely as the Federal Reserve appears divided over the possibility of an interest rate hike later in the year. Stronger inflation numbers would have suggested that the economy was more robust and ready for higher interest rates. However, today’s weak inflation data, although expected, add to a series of disappointing indicators.

The Producer Price Index, a principal gauge of inflation in the manufacturing sector, declined by 0.5% in September, its weakest number in 7 months. September retails sales were also a disappointment, missing expectations at 0.1% versus the expected 0.2%. Core retail sales slipped 0.3% below the expected decline of 0.1%. The U.S. dollar has also been falling due to a disappointing jobs report in September.

The next Federal Open Market Committee meeting is October 27-28. The markets have been pricing in approximately a 39% chance of a rate hike in December. However, this number has been declining following downturns in global and emerging markets. Today’s CPI-U numbers will not reverse the trend. Rates are likely to remain unchanged until at least March of next year.

June CPI: Inflation continues to tick higher but outlook remains tame

U.S. consumer prices increased for the fifth consecutive month in June, led higher by a rebounding price of gasoline, although there was nothing in the latest release which should pose any immediate alarm for markets or consumers at large. The latest report from the BLS reported an overall increase in headline inflation of 0.3% month on month – an increase that was inline with nearly all economists polled prior to the announcement. Looking at the headline number on an annualized basis, inflation rose 0.1 percent In the 12 months through June, following an unchanged reading for the month of May.

Gasoline prices rose 3.4% month on month, following a 10.4 percent surge in May. Given the recent volatility in crude oil prices and inventory data in July, there could be scope for the influence of rising gas prices to subside in coming months. Oil is currently trading within the $50-60 / bbl range, well below the levels seen in May and June.


Core CPI, which excludes food and energy related costs, increased 0.2 percent month on month following a rise of 0.1% previously. On an annualized basis, core CPI has now risen 1.8 percent.The June reading continues to highlight just how tame the inflationary environment is within the US economy at present. The strong dollar is helping to keep a lid on inflation by reducing the price of imports and wholesale costs. The strong US dollar has been been spurred partly by a flight to safety due to concerns in Europe and China, and partly by the market’s anticipation of a Fed rate hike later this year. We should expect to start hearing comments regarding the damaging effects of the stronger dollar by Fed officials in the weeks and months ahead should this trend continue.

The food index posts largest increase since September 2014

The price of food increased 0.3% in June, largely to an ongoing shortage in wholesale eggs which has caused a sharp jump in retail egg prices across the nation. Egg prices jumped 18.3% in June, the largest monthly gain since August 1973. Elsewhere, the index for meats, poultry, fish, and eggs rose 1.4 percent in June, with the beef index rising 0.9 percent. Food prices are likely to remain elevated in the coming months as the aftermath of the bird flu epidemic works its way through the supply chain. Wholesale food costs have been consistently increasing in PPI surveys, and these costs are likely to make their way down to the consumer in the weeks and months ahead.

Medical Price Inflation starting to cool off

Medical related inflation cooled in June which will be a welcome deviation from the overall trend in 2015. The price for Medical Care Services fell -0.2% in June and the prices for Medical Care Commodities remained unchanged month on month. Health care costs have been one of the largest contributors to inflation over the past 12 months, with both indices rising 2.3 percent and 3.3 percent respectively.

Rent Prices continue to Climb Higher

The shelter index climbed 0.3% in June, and 3% on an annualized basis as the supply of housing continues to shrink in key regions. Rent increases are also amongst the largest contributors to overall inflation in the United States within the past 12 months.

Outlook for Rates

This month’s CPI data contains no surprises, and the relatively tame reading in the core number on the back of the strong US dollar will likely stick in the minds of Fed officials in the weeks ahead. Globally, sentiment continues to wane dramatically given the continued turmoil in Greece, and increasingly China. While Greece appears to be on the verge of some sort of political settlement, the headline risk remains. In China’s case, there is a very real danger of investor sentiment turning, which could spell disaster for emerging markets overall. Latin American and South East Asian markets look at particular risk, especially on the currency front. The fate of these regions would be sealed in no uncertain terms should the Fed raise rates, and it is for this reason that it appears increasingly unlikely that the Fed will raise by year end, despite all of their rhetoric and expressed intention to do so.

November CPI Signals Tepid U.S. Inflation

This morning we saw the November CPI print a headline figure down 0.3% on a seasonably-adjusted basis, a sharper drop than the expected decline of 0.1%. It also reached a 10 month low of 1.3% as an annualized inflation rate. The Bureau of Labor Statistics release was nominally the biggest drop in 6 years, as plummeting crude oil and energy costs outweighed small rises in other indexes like housing and healthcare.

10 year historical

10 year historical

Ex-food and energy, the “core” CPI rose 0.1% in November, in line with expectations, and is currently running on a 1.7% annual pace. The two components are typically removed from most long-term inflation assessments for their volatility, and this is true now more than at any time since 2008. But they combine to make up over 23% of the total CPI calculation, so they cannot be swiped off the table by any means.

The energy index component of the CPI posted its largest monthly decline since 2008, a drop of 3.8%, while the trailing 12 month drop is over 10% across the energy commodity index. Economists expect this cost to continue plummeting for consumers, and this was the fifth straight month of declines on the back of crude oil spot prices that are down 50%+ across the globe. Gas prices were down a sharp 6.6% in the month as measured by the BLS.

Indexes for housing, healthcare, airfares, and alcoholic beverages rose in November, while the indexes for apparel, new & used autos, recreation, and consumer personal care products all declined.

The Chain-Weighted CPI fell slightly in November, to 236.151. 

Market Reaction Muted

S&P futures stayed mainly in line after the release of the report, going from 12-16 points positive to just under 9 points after the report. And in early trading, U.S. equity indices were broadly higher as investors and analysts looked to bottom-fish the recent selloff during what is historically one of the best single trading weeks of the year.

The effect of the CPI on equity and fixed income markets is hard to parse out today as there is so much going on geopolitically; Russia continues to do whatever it can to stabilize the ruble, while astonishing news is coming out regarding new trade liberalization talks with Cuba.

Treasury markets sold off a bit across the curve, as investors felt confident that the Fed would remain measured in their approach to monetary policy tightening. Risk appetites were up, as evidenced by some stabs being taken at buying up energy stocks:

Sector Overview 121714

All eyes now move forward in the day to Janet Yellen and the FOMC, which are wrapping up their last sit-down of the year followed by the announcement of  their near-term forecast at 2 p.m. EST. There will also be a press conference by Chair Yellen at 2:30 p.m.

The broad expectation prior to this morning’s CPI release was that the Fed removes the “considerable period of time” language in its telegraphing ritual. Janet Yellen and company want to signal to the market that a future rate hike could be right around the corner, although the last look at the Fed Funds futures curves still indicate that we shouldn’t expect a hike before the second quarter (July) of 2015. 

(screenshot courtesy of the CME Group)

Fed Funds outlook 2015 CME

What Today Means For Fed-Speak and Rates

Today’s CPI drop comes after three straight months of 1.7% annualized rates. All in all, we don’t see much change the overall storyline that the United States is running well below the Fed’s target rate of 2% inflation. And this 2% is already a “readjustment” to the new global norm of low, low interest rates. Also, the Fed’s generally preferred inflation indicator – the PCE – is running at or below even the piddly price growth we’re seeing in the CPI.

PCE FRED historical 2009-2014

There is also a lower level of inflation going on in hourly wages than in the CPI; Ms. Yellen has touched on this metric repeatedly as a sign that there is still a lot of slack in the labor market.

But this morning’s report of a 0.6% monthly rise in real average hourly earnings – the largest rise in about six years – all but assures that the FOMC will indeed position their language so that markets are ready for rate hikes in 2015. This economy is just running too smoothly to continue neglecting the work that needs doing to normalize U.S. interest rate policy.


Future Outlook

We can expect to see the effect of ever-lower energy prices begin to slowly creep into the price levels of non-energy index components. The savings will pass through the PPI and wholesale level, then on to the consumer starting in 2015.

This is a trend that will continue for some time, as this data set is already looking into the rearview, while crude futures continue to slide by the day. So even if we’re looking at the core CPI number with energy taken out, it should not be surprising to see 1.5% run-rate clips for a little while.

The Fed will likely look through the current volatility in crude oil as a “one-off”, much like they did in 2011 when many commodities spiked higher and there was a fear among some of a spike in inflation. It didn’t happen then. The one-off we see now in energy is a deflationary event, which is potentially more dangerous as we are already in a zero rate environment.

With GDP predicted to rise a healthy 2.9% next year and slack quickly evaporating from the labor market, the Fed has all the cover in the world to raise rates. Our best guess is that Yellen will remove the “considerable period” language – a hawkish move – then look to the press conference to reiterate previously stated concerns about deflationary pressures coming from other areas around the globe.