United States
Consumer prices rose 0.2% in October, taking CPI to from 2.4% to 2.6%. Core prices rose 0.3%, keeping Core CPI at 3.3%. Although inflation’s last mile to 2% continues to be tricky, we believe that an overarching disinflationary trend remains in place, allowing the Fed to continue executing its rate cutting cycle in the near term.
Energy and core goods prices continue disinflationary trends
Energy prices were flat in October, with motor fuel prices generally falling but utility prices slightly rising. Core goods prices were also flat as used cars rebounded 2.7%, while non-durable goods detracted, such as apparel prices, which fell -1.5%. Food inflation was relatively benign at 0.2% in October.
Figure 1: Energy prices continue to help keep headline CPI down
Source: Bureau of Labor Statistics, Macrobond, Bloomberg, Insight, November 2024
Core services continue to show slow progress
Core services inflation categories, often considered "stickier," continued to show slow but steady progress.
Shelter CPI remained steady at 4.9% over the year to October, reflecting stable-to-slightly-easing rental components but slightly higher hotel prices. Excluding shelter, headline CPI was 1.3%.
“Supercore” services (which exclude shelter) also remained relatively stubborn. Transportation services eased slightly but continue to run hot. Its easing largely reflecting some easing in vehicle insurance prices, albeit on the negative side airline fares rose 3.2% October. Elsewhere, medical services rose from 3.6% to 3.8% year-over-year (Figure 2).
Figure 2: Supercore service sectors continue to run relatively hot
Source: Bureau of Labor Statistics, Macrobond, Bloomberg, Insight, November 2024
Tariffs may impose longer-term inflationary pressures
Markets are getting to grips with the potential impacts of the incoming administration’s policies. In our view, President-elect Trump’s proposed tariffs offer the clearest inflation risks for his upcoming term.
Nonetheless, it remains to be seen how aggressively the administration will follow through on its promises of major tariffs, including across the board import duties. Further, we suspect that it may take some time to implement, and may not feed into inflation indices in the near term.
Figure 2: Higher tariffs post potential upside inflation risks through President-elect Trump’s term
Source: Chad P Brown, Peterson Institute for International Economics, April 2023: https://www.piie.com/research/piie-charts/2019/us-china-trade-war-tariffs-date-chart
We expect the Fed to stay the course
In the near-term, although the last mile to 2% inflation will be bumpy, we believe that the Fed will continue to execute its rate cutting cycle as core services inflation continues to show slow but steady progress
In our view, another rate cut in December remains a reasonable base case.
