Lifted by higher energy costs, CPI inflation rose 0.3% in October. Core inflation strengthened after a couple of soft prints. October’s pickup suggests inflation continues to gradually firm and should keep the Fed on course.
Inflation Climbs in October
Inflation bounced back in October, with the largest monthly gain since January. Consumer prices rose 0.3% last month with fairly widespread gains among subcomponents. One exception to this was food, where prices slipped 0.1%. On a year-ago basis, inflation is up 2.5% compared to 2.0% this time last year, but rising wages have kept real earnings rising.
Whipsawed: Energy and Inflation
Higher energy costs were a driving factor in the pickup in inflation last month. Although gasoline prices according to AAA were falling through most of October, they started the month at the highest levels since June following a run-up in September. Since then, gasoline prices have dropped along with oil and will likely be a drag on inflation in the near term. Unlike oil prices, however, gasoline prices are still up relative to last year and look set to prop up year-over-year inflation through November, or beyond if OPEC supply cuts come to fruition.
Consumers may not get a big break in energy spending based on prices at the pump anyway. The cost of energy services, i.e., electricity and natural gas, saw the biggest monthly gains since early 2014 in October. Further increases could very well be in store if this winter proves colder than usual. Natural gas spot prices have jumped to nearly a five-year high and inventories in storage are at the lowest level for this time of year since 2003.
Core Inflation Bounces Back
After coming in light in August and September, core inflation rose 0.19% in October. That should help alleviate fears that inflation has hit another soft patch, but the details suggest that core inflation is hardly getting out of hand. Core goods prices posted the largest monthly increase since January, although that merely unwinds what looked to be undue weakness the previous month. Indeed, the curiously large 3.0% drop in used auto prices last month was almost entirely reversed. The dollar’s climb this year should keep goods prices from rising rapidly even as tariffs begin to seep into prices in the coming months. Core services prices advanced 0.17%, but the below trend reading was held down by some of the more volatile components, like a decline in lodging away from home and flat prices for airfares.
Keeping the Fed on Course
The plunge in oil prices this past month stands to put downward pressure on inflation, but there is room to give before inflation looks at risk of falling to levels inconsistent with the Fed’s target. Today’s rebound in core inflation suggests the underlying trend remains modestly higher. While businesses are beginning to see a break on some commodity prices, tariffs and a tight labor market are pushing other costs higher. We expect core inflation to trend up in the year ahead, spurred by more businesses willing to raise prices.
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