- Core CPI was slightly softer than expected, but the trend is hot
- Shelter and core goods weighed down inflation…
- ...but core service price inflation remains hot
- Markets has a relatively small reaction that marginally reinforced cut pricing
- US CPI / core CPI, m/m %, SA, September:
- Actual: 0.23 / 0.31
- Scotia: 0.3 / 0.3
- Consensus: 0.4 / 0.3
- Prior: 0.4 / 0.3
US core inflation came in slightly below almost all expectations for the month of September. Most of the softening was driven by shelter and little evidence of tariff pass through into core goods prices. Still, beneath the hood lies ongoing strong pressures on underlying core service prices.
The result added a little to market expectations for rate cuts by the Federal Reserve. The two-year Treasury yield fell by about 5–6bps at first but clawed that back to about 3bps. Cumulative pricing for cuts between now and the April meeting increased a bit to about 80bps of further reductions. The dollar swung from gaining against most major FX crosses to losing ground against most except for CAD in the wake of Trump’s attacks on Canada last night and continuing this morning.
Chart 1 shows the recent pattern. Core CPI landed at 2.75% m/m SAAR in September, down from 4.2% in August. The three month moving average is now 3.6% m/m SAAR. Don’t tell me that US inflationary pressures have gone away. I don’t believe that Chair Powell will say that next Wednesday, although he has pre-committed himself to looking through inflationary effects of tariffs as transitory should they arise.
DETAILS
The breadth of inflationary pressures eased off a touch but remains high (chart 2).
Core goods inflation—where tariffs would be most likely to show up—was muted at just 0.22% m/m SA, or 2.7% m/m SAAR (chart 3). That’s not light, but cooler than the prior month’s reading.
Core services inflation (ex-housing services and energy services) accounts for about one-quarter of the CPI basket and those prices were up by 0.35% m/m SA, or 4.3% m/m SAAR (chart 4). There remains high resilience in core service price inflation in the US economy.
Seasonal factors were potentially distorting. September posted an above average m/m seasonally unadjusted gain in core CPI (chart 5) but this was tamped down by a lower than normal seasonal adjustment factor (chart 6). Core CPI was about as low as it could have been compared to using other SA factors drawn from prior months of September (chart 7). SA factors are mechanically calculated using standard X12A adjustments in unthinking fashion and these adjustments have a strong recency bias that may result in SA factors that are not appropriate.
It's somewhat futile without PPI, but based on core CPI versus core PCE weighting differences, core PCE is tracking very close to core CPI as 0.22% m/m SA. There are also other differences, like income and substitution effects that PCE does a better job of capturing, but in any event we won't get PCE until after the shutdown ends. Recall the only reason we go CPI was for the COLA requirements.
Watch the publication of the share of the CPI basket estimated using proxy means when it is likely to be published sometime after 11amET. That share has been over one-third of the basket—a record high—due to budget cuts at the BLS.
Please see charts 8–16 that provide a breakdown of select US CPI components. Charts 17–18 provide a breakdown of the whole basket in y/y terms that are both raw and as weighted contributions to the overall change in CPI. Charts 19–20 do likewise for the m/m CPI changes.
Please also see the accompanying table that provides further detail.
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