Inflation hotter than expected

The increase can be attributed to supply shocks in a few key sectors.

The Consumer Price Index (CPI) rose 0.2% in September, the same as August but up only 2.4% from a year ago. That is the slowest year-on-year increase in the overall index since February 2021, before the post-pandemic inflation took hold.?

The Fed may defer one of those interest rate cuts.

Energy prices continued to cool but oil prices have become more volatile. We are seeing a tug of war erupt between escalating tensions in the Middle East and weaker global demand.?

The sticking point was prices at the grocery store, which surged 0.4% in September, quadruple the pace of August. Food prices accelerated on a year-over-year basis but remain closer to pre-pandemic norms than earlier in the recovery.?

The largest gains showed up in meats and dairy-related products. Egg prices soared 8.9% during the month alone, boosted by yet another outbreak of the bird flu and culling of chicken stocks. We have already had to put down a record number of chickens this year to stem the spread of the bird flu. Egg prices are now up a staggering 39.6% from a year ago.??

Core CPI, which excludes the volatile food and energy components of the index, rose 0.3% during the month. That is the same as last month. The year-on-year measure rose 3.3%, up a tick from the 3.2% pace of last month.?

A sharp deceleration in prices last year is buoying year-over-year gains in the core CPI. Those “base effects” will drop out of the data in early 2025. A new wave of supply shocks due to the hurricanes and geopolitical risks makes comparisons less certain. ?

Big-ticket durable goods reversed course and rose instead of falling in September. A surge in the cost of tires drove those gains and is less worrisome than it appeared at first glance. Everything else in durable goods was either down or flat, which should help tame inflation.

Shelter costs, which represent the largest component of the index, showed signs of cooling in September. They rose only 0.2% during the month and slowed to a 4.9% pace from a year ago, after rising 5.2% last month. Rents and owners’ equivalent rent slowed, while hotel room rates plummeted.?

Brace for a rise in hotel room rates in the wake of the hurricanes in October. The good news is that we have rounded the corner of hurricane season with more of a cushion to absorb costs than previously estimated.

The improvement in inflation this year has been broader than last year. That is another plus as it should help insulate us from any step-up in prices due to supply shocks.??

The super core CPI, which strips out shelter costs, jumped 0.4% on the heels of a sharp increase in insurance costs, airfares and admissions to sporting events. That translates to a 4.3% increase from a year ago, an improvement from the 4.5% annual gain in August. Admissions for sporting events alone surged 10.9% during the month and are now rising at a double-digit pace from a year ago. Those tickets?are becoming a luxury most can no longer afford.?

The rise in the super core is a disappointment but highly concentrated. Hurricanes could add to those pressures. The Federal Reserve tends to look through temporary supply shocks from disasters. That is getting harder, given how frequent and devastating they are becoming.?

Another issue is layoffs, which surged in the wake of Helene. North Carolina saw the largest increases. The October employment report is going to be extremely weak as disruptions due to the hurricanes and strikes in the aerospace industry deal a blow to payrolls. They?could even slip into the red temporarily, while unemployment picks up.

Bottom Line

Inflation came in hotter than expected. Most of that increase could be attributed to supply shocks in a few key sectors. That news will be balanced by the Federal Reserve with a pick-up in layoffs and initial unemployment claims in the most recent week. We have held to our forecast for two quarter-point rate cuts by year-end, but the risk is that the Fed may defer one of those interest rate cuts until after the election to ensure inflation remains tame.