US Inflation Cooled Less than Expected in September

Inflation cooled again in September, but not as much as expected this time. The consensus forecast was that the year-over-year change in total CPI would slip to 2.3%.

However, energy prices did in fact plunge month-over-month, as expected. This was driven by a 4.1% price drop for gasoline and a 6.0% decline for fuel oil. But food prices climbed 0.4% month-over-month, the biggest jump since January.

That said, the real issue is core CPI, which rose 0.3% for the second straight month. This was higher than the 0.1% to 0.2% upticks seen for the months from May to July. For the first time since February, prices for goods excluding food and energy went up, by 0.2%. The price gains for used cars and trucks (the first since May) and apparel were particularly noteworthy. The growth in transportation costs seen in recent quarters may be what’s driving up goods prices. That said, the year-over-year change in the price of goods excluding energy and food stayed negative at ‑1.0%.

Meanwhile, year-over-year growth in the price of services (excluding energy) softened somewhat but remains high at 4.8%. Progress on that front has been decidedly slow. At 0.4%, the month-over-month change in service prices was the same as in August. This time, the upward pressure didn’t come from the rise in shelter prices, which fell from 0.5% in August to just 0.2% in September, the slowest since June. Instead, the supercore services index, which excludes shelter, posted its strongest month-over-month growth since March. In addition, the 3‑month annualized change in the index almost doubled (from 1.9% to 3.8%) from July to August. Officials at the Federal Reserve (Fed), who closely watch this indicator, may be disappointed by the latest developments.

The persistent growth seen recently in certain consumer prices, September's robust employment numbers and the relatively strong performance of other economic indicators like the ISM Services index all suggest that the Fed won't step up the pace of monetary easing. We expect it to avoid any further 50‑point cuts and stick to 25‑point cuts for the foreseeable future, including at its next meeting in November.