- Nov. 14, 2022
-- Last week's cooler-than-
expected inflation data offered some relief to investors and the Fed, potentially indicating that October could be the start of a disinflationary trend that lasts through next year. The headline consumer price index (CPI) reading was up 7.7% from a year ago, the smallest annual increase since January, and down from September's 8.2% pace. More importantly for the Fed was that the core index, which excludes food and energy, slowed more than expected, advancing 0.3% from the prior month (vs. 0.6% in September) and 6.3% from last year (vs. 6.7% in September). Stripping out shelter, core CPI fell 0.1% last month, marking the first decline since May 20201.
In response to the CPI surprise, stocks surged, Treasury yields sank, and the dollar weakened, showcasing once again that inflation remains the No. 1 driver of market outcomes this year.Downward consumer price pressures in the pipeline
One month of cooler inflation doesn't make a trend, and markets learned that the hard way after the downside surprise in August more than reversed in the subsequent months. But at the same time, a month of better data is needed to start a trend, and several leading indicators of inflation that we track point to further moderation ahead.
- Goods inflation – Easing supply shortages, lower consumer demand, and excess retailer inventories are all contributing to a sharp slowdown in goods inflation, with prices declining 0.4% month-over-month. The biggest drag came from a drop in used car prices, consistent with the decline in auction prices observed since February. The Manheim index, which tends to lead the CPI used car price index by at least one month, is currently 15% off its high and points to further easing in November1. Beyond autos, prices for household furnishings, apparel and electronics all declined.
- Services inflation – Price increases for services tend to be persistent and slow-moving on the way down but are also starting to shift in the right direction. Housing inflation (shelter) which is the biggest services component and accounts for about a third of the overall CPI index, accelerated from last month, but that was driven by the volatile lodging category (hotel rates). More encouraging, prices for rents slowed for the first time in four months1.
- Food and energy inflation – Food inflation remains high, but the food-at-home index posted its smallest monthly increase since December 2021. On the energy front, after three straight monthly declines, gasoline prices exerted some upward pressure on headline inflation last month, though that was partially offset by a decrease in natural gas prices1.