CPI Review: Positive Surprise but Fed Still on Track for 2024 Cuts

Summary

• Core and headline CPI were above market expectations.
• OER inflation slowed but core goods and supercore services inflation accelerated.
• Nevertheless, the disinflation trend continued.

Market Implications

• I still expect the Fed to cut twice more in 2024.

Another Upside Surprise

September core and headline CPI prints surprised on the upside, as Sam’s model predicted (Table 1).

MoM core and headline CPIs were roughly unchanged from August, but the drivers were different. Goods and supercore services were higher and OER lower than in August (Table 2).

Core Goods Deflation Ended

Core goods prices, including used cars, rose (Table 3, Chart 2).

Housing Inflation Slowed

September OER slowed to 33bp MoM and 5.2% YoY from 50bp and 5.4% respectively in August (Chart 2). The increased volatility in the MoM prints could signal a move to a lower regime.

In any event, market rent indices (these aggregate rents paid by tenants moving to new units) that tend to lead OER are not slowing (Chart 3). At the September FOMC, Chair Powell stressed if market rents were not picking up he expected shelter costs in the consumer price indices to continue moderating, if more slowly than the Fed initially expected.

Supercore Inflation Appears for a Third Month

Supercore inflation was 40bp MoM, up from 33bp in August (Chart 4). The negative prints in May-June now look like outliers.

Medical and transport services inflation accelerated while other categories inflation slowed.

Disinflation Trend Continued

Despite yesterday’s surprise, on a YoY basis, measures of inflation trends such as median price, trimmed mean or sticky inflation continued slowing. This suggests the trend is still down (Chart 7). However, core inflation accelerated to 3.3% YoY from 3.2% in August.

Market Consequences

I still expect two more 25bp cuts in 2024 as the Fed is focused on core PCE rather than core CPI. Also, the Fed tends not to react to single data points, and the CPI trend remains downward.

Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)