Instant Insights: Too soon to declare victory on inflation | Insight Investment

Headline and core consumer prices rose 0.2% and 0.3% respectively in September. This took headline CPI down from 2.5% to 2.4%, the slowest pace since 2021. However, Core CPI accelerated slightly from 3.2% to 3.3%.

Although progress on headline CPI is encouraging, we expect core inflation’s path to the Fed’s 2% target will be protracted. While our base case is that the Fed will remain comfortable cutting rates over the coming months, stubborn core inflation means that is too soon to declare total victory on inflation just yet.

Energy and core goods sectors continue to be disinflationary

The energy and core goods components continued to have a disinflationary impact on headline CPI on a year-on-year basis (Figure 1). However in September core goods prices rose 0.2% (the first rise since April), with used cars snapping three months of declines and apparel rising 1.1%. Food prices also rose by a notable 0.4% in September.

Figure 1: Core goods and energy continued to contribute negatively to CPI on a year-on-year basis¹

Encouragingly, the “shelter” component slowed from 5.2% to 4.9% over the year to September, its lowest level since February 2022. This was driven by easing rental components and weaker hotel prices. Excluding shelter, CPI was 1.1% year-on-year.

However, the “supercore” components (which exclude housing) continue to remain stubbornly elevated (Figure 2) thanks to accelerating inflation in transportation services (particularly airline fares, leased vehicles and public transport) as well as medical services.

Figure 2: “Supercore” CPI categories remain stubbornly high²

Energy continues to push headline CPI close to the Fed’s target

Falling energy prices provided the largest disinflationary impulse in September, falling 1.9%. While energy price trends have been benign even in the face of rising geopolitical tensions in the Middle East, we continue to watch developments closely, as the risk of rising global oil prices cannot be ruled out.

Figure 3: Energy continues to provide the main disinflationary impulse on headline CPI³

Conclusion: too early to declare victory

Headline CPI is getting closer to the Fed’s target, but the continued stubborn nature of Core CPI will raise some questions at the Fed. Although the central bank is increasingly confident that inflation is on a sustainable path to its 2% objective, it will likely continue to stress that it is not yet ready to declare victory.