CPI headline inflation hits zero in October, core inflation rises less than expected

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The Consumer Price Index indicated zero inflation M/M in October, less than the 0.1% increase expected and the 0.4% rise in September. The month’s print was mainly due to falling gasoline prices.

On a Y/Y basis, the October CPI climbed 3.2%, compared with the +3.3% expected and +3.7% prior.

“CPI came in below expectations across the board as the increase in health insurance was offset by a sharp decline in used auto prices, gasoline, and shelter,” said SA Investing Group Leader Mott Capital Management’s Michael Kramer. “With CPI coming in flat M/M versus an expected rise of 0.1%, it could suggest that the economy is now decelerating faster than previously thought.”

The index for shelter continued to increase in October, offsetting a decline in the gasoline index. The energy index fell 2.5% M/M, with a 5.0% drop in the gasoline index more than offsetting rises in other energy components.

Core CPI, which excludes food and energy: +0.2% M/M vs. +0.3% expected and +0.3% prior.

+4.0% Y/Y vs. +4.1% expected and +4.1% prior.

In the core index, prices that rose in October included rent, owners’ equivalent rent, motor vehicle insurance, medical care, recreation, and personal care. Those that dropped during the month included lodging away from home, used cars and trucks, communication, and airline fares, the Bureau of Labor Statistics said.

Greg McBride, chief financial analyst at Bankrate, said the better-than-expected report doesn’t mean inflation has been beaten. “Inflation readings came in lower than expected, but the usual trouble spots – shelter, motor vehicle insurance, and personal care – still remain,” he said. “Shelter has accounted for 70% of the increase in core prices over the past year and offset the 5% decline in gasoline prices during October.”

Fitch Chief Economist also noted the stickiness of rent inflation. “Core goods prices are now basically stable and services inflation is edging downwards, though it remains far too from the Fed’s perspective at 5.5%,” he said. “The slowdown in shelter inflation on a month-on-month basis was notable, but this was mainly explained by lodging away from home. Rents (primary residence and owners equivalent) continue to rise rapidly and are proving one of the most stubborn elements of services CPI inflation.”

RSM Chief U.S. Economist Joseph Brusuelas expects the Federal Reserve to keep rates on hold in December and thinks it’s done hiking rates “despite the official tightening bias in policy and policy rhetoric. We would urge the Fed to stabilize real rates and then consider cutting the policy rate in Q2’24.”

The markets appear to agree with that assessment. The probability of the Fed holding in December jumped to 99.79% on Tuesday, compared with an 85.5% probability on Monday. The chance of a 25 basis point increased dropped to 0% from 14.5% the day before, according to the CME FedWatch tool.

The equity futures jumped after the CPI report. The S&P 500 futures rose 1.2%, Nasdaq +1.6%, and Dow +1.0%. Bonds also rose. 10-year Treasury yield (US10Y) fell 17 basis points to 4.47%.