October CPI expected to show inflation still ran hot even as some goods prices cooled

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Consumer inflation may have come down slightly in October as goods prices declined, but prices for services and rents are expected to continue to climb.

Economists expect the October consumer price index rose 0.6% from September, or 7.9% from a year ago, up from 0.4% or 8.2% annually in September, according to Dow Jones. Excluding food and energy, core CPI is expected to have risen by 0.5%, or 6.5% on an annual basis. That is lower than the 0.6% gain in September, which was a 6.6% annual pace.

The CPI, released Thursday at 8:30 a.m., is a key report for the Federal Reserve, which meets in mid-December and is widely expected to raise its fed funds target rate by a half percentage point.

The central bank has indicated it will reduce the size of its interest rate hikes, but it may raise them to a higher level and keep them there to fight inflation. For that reason, the report will be closely scrutinized by investors, and it could affect financial markets if it is either hotter or cooler than expected.

Customers shop for used vehicles at a CarMax dealership in Lexington, Kentucky.
Luke Sharrett | Bloomberg | Getty Images

“We’re going from red hot to rolling boil, and that’s not cool enough for the Fed,” said Diane Swonk, chief economist at KPMG. Swonk said policymakers should feel comfortable enough with the report to raise rates by a half point, as it indicated it would do. The Fed had been hiking in 75 basis point increments. A basis point equals 0.01 of a percentage point.

Tom Simons, Jefferies money market economist, said investors seem to be expecting a cooler number than the consensus forecast.

“It sounds like the consensus is that the number is going to miss consensus. Generally everyone expects it to come in below these forecast numbers,” he said. “There’s a lot of mixed movement across different categories of prices.”

Simons expects core CPI rose 0.4% and that, within that, goods prices declined 0.2% while services rose 0.6% . Services includes items such as medical care, rents, airfares, recreation, education and car insurance.

The CPI report is widely expected to show that used car prices are falling, but rents and shelter continued to rise.

“We should start to see some of the discounting that’s coming through on housing-related big ticket items, like appliances,” Swonk said. She expects inflation in goods related to housing, like furniture, to continue to see declines, and shelter costs to see declines later on.

“It won’t be in this month but by early 2023, we could see more moderation in shelter costs,” she said. Shelter costs are 40% of core CPI.

Blerina Uruci, T. Rowe Price’s chief U.S. economist, said the October report will still look hot, but there should be a deceleration in core inflation.

“Some of it is coming from goods prices because there’s a slowing in demand as we’ve seen in consumer spending recently,” she said. High goods prices ultimately hurt demand. “It’s some small progress that increased inflation can eat itself up in a way.”

Uruci said the strong U.S. dollar can also help reduce inflation on goods that are imported. “The recent U.S. dollar strength should be a source of disinflation” in coming months, she said. “This is going to play out through the core goods channel.”

Bespoke Investment Group notes that economists have consistently underestimated inflation over the past year. The market has mostly declined on CPI reporting days, the firm said. But the S&P 500 did stage a surprisingly strong rally of 2.6% last month even though September CPI was hotter than expected.

That’s been true only a minority of time recently. The S&P 500 has declined a median 0.44% on the past 12 CPI reporting days, and on the eight days when the CPI was higher than expected on both a core and headline inflation basis, the S&P declined a median 1.23%.

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