US CPI Review: September 2024

Driven by a significant increase in adjusted core services prices, US inflation came in above consensus expectations in September.

Headline and core CPI growth come in above expectations

Headline CPI growth fell to 2.4% YoY in September, from 2.5% in August. While declining for a sixth consecutive month, growth came in above the Economics Uncovered and consensus forecasts of 2.3%.

Core CPI growth rose to 3.3% YoY (from 3.2%), which was also above both the Economics Uncovered and consensus forecasts of 3.2%.

On a monthly basis, headline CPI growth was 0.18% (Economics Uncovered estimate: 0.04%). While this saw 3-month annualised growth rise to 2.1%, 6-month annualised growth fell to 1.6%, its lowest level since September 2020.

Core CPI growth was 0.31% MoM (Economics Uncovered estimate: 0.22%), the highest reading seen since March. This saw 3-month annualised growth rise to 3.1% (its highest level since May), although 6-month annualised growth fell to 2.6% (its lowest level since March 2021).

CPI ex-shelter measures also come in well above expectations as services price growth jumps

CPI growth excluding shelter was also much higher than estimated on both a headline (1.1% vs 0.8% Economics Uncovered estimate) and core (2.1% vs 1.8% Economics Uncovered estimate) basis. The key driver of the larger than expected growth was the adjusted core services category, which is discussed in greater detail below.

Durables price decline begins to moderate

Please note that unless otherwise stated, all figures in the section below refer to non-seasonally adjusted data.

As expected, the pace of the annual price decline in durables prices moderated in September (YoY growth was -2.9%, from -4.2% previously), with the latest data providing further signs that the particularly large declines that have been seen in durables prices are now normalising — indeed the pace of MoM growth was even stronger than expected (0.00% MoM vs -0.19% Economics Uncovered forecast).

While used car prices fell MoM, the fall was much less than suggested by the two-month lag of wholesale used car prices and the historical seasonality of retail prices in September. As a result, a materially larger than usual gap between retail and wholesale used car prices persisted in September.

New car price growth was moderately above its historical average in September, marking a fourth consecutive month of above average price growth.

Other durables (i.e. excluding new and used vehicles) prices also saw above average growth in September, marking a third consecutive month of above average growth.

Nondurables show some mixed results

While the CPI energy commodities index came in largely as expected (-4.87% vs -4.95% Economics Uncovered forecast), CPI food at home prices reversed the relatively significant decline seen in August with MoM growth that was 0.25% above its historical average recorded, versus MoM growth that was 0.24% below its historical average in August. The broader trend in CPI food at home price growth appears to be largely consistent with historical averages, though price pressures have increased somewhat in recent months.

CPI food away from home prices continued to show evidence of being in a broader disinflationary trend, albeit a gradual one, with the 3-month moving average of relative price growth down to its lowest level since April.

Shelter remains on a disinflationary path, but adjusted core services prices jump

Rent of primary residence (RPR) and owners’ equivalent rent (OER) both delivered results that were broadly consistent with an ongoing disinflationary trend, although OER continues to lag RPR in moving lower.

Both indicators saw a further reduction in YoY growth in September (RPR: 4.8%, from 5.0%; OER: 5.2%, from 5.4%), with relative MoM growth rates remaining within broader downtrends. The latest New Tenant Rent Index data from the BLS continues to indicate that OER and RPR are likely to see material further disinflation over the quarters ahead. The BLS is due to release a further quarterly update on this index during October.

Overall adjusted core services prices (i.e. excluding lagging shelter, indirectly measured health insurance and inconsistently measured leased cars & trucks and household operations) saw a material increase in MoM growth in September, with price growth 0.31% above the historical average. This marked the fastest pace of relative price growth since April. Key drivers of the uptick in MoM growth include the CPI motor vehicle maintenance, motor vehicle insurance, motor vehicle fees, airline fares and professional services healthcare categories.

This resulted in YoY growth remaining at 4.6%.

Monetary policy implications

With the latest jobs report allaying some concerns about the state of the US jobs market and the latest CPI report indicating that core inflation continues to remain elevated, the prospect of a 50bp rate cut at the next FOMC meeting currently looks like a very distant prospect.

Given the last two core CPI readings (average MoM annualised growth of 3.6%), I expect talk of the potential for a pause in the rate cutting cycle to grow in the near-term.

Barring another weak jobs report, the narrative is unlikely to shift back to the potential need for another 50bp rate cut — though given the broader downtrend within US employment data, it must be stressed that September’s bounce back in nonfarm payroll growth could prove to be the outlier, meaning that the current ebbing of concerns surrounding the future direction of the US economy, may not prove to be enduring.

Financial market implications

Despite another relatively hot core CPI report, the market reaction was fairly muted, with the S&P 500 falling by 0.21% and the CME FedWatch tool continuing to indicate a 100% chance of a 25bp or more rate cut at the next FOMC meeting. Such a response indicates that most market participants are no longer concerned about the inflation outlook and are of the view that while there may be bumps in the road, that price pressures are likely to continue to broadly moderate over the months and quarters ahead — I believe that this is the correct view.

While a relatively hot core CPI number may nevertheless continue to pressure bond yields — which have risen materially since the latest jobs report — the more pertinent driver of asset markets in the near-term continues to be the employment market, as its trajectory has the potential to materially impact the economic and corporate earnings outlook, with it being the key driver of how aggressively the Fed decides to cut interest rates.

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