Thursday's highly anticipated Consumer Price Index (CPI) report surprised to the upside. Headline CPI rose 0.4% in September, 0.2 percentage points higher than expected by the Bloomberg consensus. Over the year, the CPI is up 8.2%, a slight step down from August's 8.3% reading. Even with some easing on a year-ago basis, the details of the report suggest inflation still has plenty of momentum and remains broad-based.
Gas prices slid 4.9% last month, helping to offset some solid increases seen elsewhere in the consumption basket. Food price growth remains a major pressure point. The food CPI rose 0.8% in September, trailing only modestly behind the 1.0% average pace over the prior three months. On the bright side, we suspect food inflation will not worsen from here. Food-related commodity prices have rolled over, and in the separately-reported Producer Price Index, transportation and warehousing costs slid for the third consecutive month in September, providing scope for disinflation in food, and goods prices more broadly, in the coming months.
Excluding food and energy, the core CPI rose 0.6% in September, matching August's pace and pushing the year-ago rate up to a fresh 40-year high of 6.6%. Core goods prices were flat over the month, with notable declines in used vehicles (-1.1%), education & communication goods (-0.6%) and apparel (-0.3%). Core services, on the other hand, rose a blistering 0.8%. Strength was broad-based, with sturdy increases in transportation services (1.9%), medical care (1.0%) and owners equivalent rent (0.8%). In short, services inflation continues to gain traction, while goods inflation is showing signs of slowing. For insight on what the latest consumer price data mean for the FOMC's thinking, please see this week's Interest Rate Watch.
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