Inflation Slowdown Persists
The Consumer Price Index (CPI) remained unchanged in October, holding steady since the 0.4% increase recorded in September. This resulted in an annual rate of 3.2%, slightly below expectations of 3.3% and a decrease from the 3.7% reported in the previous month. Conversely, core CPI inflation, excluding volatile categories such as food and energy, increased by 0.2%, down from 0.3% in September. On an annual basis, it reached a rate of 4%, slightly better than the anticipated 4.1% and matching September’s figure. This marks the lowest level for core inflation in two years.
Gasoline prices fell by 5% in the month (-5.3% annually), reversing the 2.1% gain observed in the previous month. Consequently, the all-energy component declined by 2.5% in the month, leading to a 4.5% annual decrease. Meanwhile, pressure persisted in the food category; food at home increased by 0.3% in the month (+3.3% annually), while food away from home advanced by 0.4% in the month (+5.4% annually). On the other hand, the shelter index advanced by 0.3% in the month (+5.5% annually), showing improvement compared to September’s 0.6% increase (+6.7% annually). This category is crucial, representing the largest average U.S. household expenditure and contributing more than 70% to the total increase in the index excluding food and energy.
The trend in inflation continues to show improvement from the 9.1% peak reached in June of last year. Additionally, October non-farm payrolls revealed a significant deceleration, with only 150,000 jobs created, indicating potential signs that employment is beginning to react to the Federal Reserve’s efforts to correct imbalances, which have contributed to inflationary pressures.
In this context, the consensus probability for December suggests no additional increase in the federal funds rate, which is expected to remain in the 5-5.25% range (the highest in 22 years). However, the prevailing narrative of a tightening environment, i.e., “higher interest rates for longer,” could persist, as reiterated by Jerome Powell on multiple occasions, following his commitment to align policy with the 2% inflation target. He emphasized in recent days that he is not yet confident that enough has been done to bring it to that target.
Change (%) in the last twelve months in CPI and Core CPI
Source: U.S. Bureau of Labor Statistics
Target Rate Probabilities for the FED Meeting on December 13, 2023
Source: CME Group