Last month, we thought that the in-line August inflation print would lead the Fed to settle for a typical 25-basis point cut. Instead, it went for a larger 50-bp point reduction, mostly on account of a softening labor market. Such are the ironies of the data flow: since then, the labor market data has improved, and the September CPI came in a touch stronger than expected. Should this lead the Fed to pause in November? We do not believe so. There is little to be gained but confusion from any sort of stop and go approach to policymaking so we remain on board with cuts in both November and December. The January meeting would be an opportune moment to pause and then allow incoming data to dictate whether the pause should be extended to March (right now, we do not think so).
Overall prices rose 0.2% m/m in September, and core prices rose 0.3%. The headline was flattered by a 1.9% m/m decline in energy prices (gasoline was down 4.1% m/m) but food prices rose 0.4%. Services also increased 0.4%, but not because of housing, which only rose 0.2%. Indeed, shelter was up just 0.2% and owners’ equivalent rent 0.3%, the least in three months. However, we don’t want to read too much into this downshift as it has happened before and did not last. There seems to be some lingering seasonality as well, which suggest a higher print next month. And this month shelter was flattered by a big drop in hotel rates, that is unlikely to repeat (itself payback for big jump the month before).
Core goods prices increased 0.2% m/m, the most since May of 2023 on a combination of surging apparel prices and higher car prices. The broader trend of goods disinflation may be starting to abate and risks on this front are intensifying (threat of tariffs, strikes, weather, etc.). This is something to watch for in 2025 but we suspect we’ll slide towards, not fall into it. Services prices rose 0.4% m/m overall, lifted by a 1.4% m/m jump in transportation services (airfares posted another big increase) and a 0.7% jump in medical care services.
All this left headline CPI inflation at 2.4% y/y in September, a tenth lower than in August, but core inflation rose a tenth to 3.3% y/y. Headline inflation looks likely to tick up a little further though year-end, though core should stabilize here or even improve incrementally.