Inflation is not going away quietly. The Consumer Price Index (CPI) rose 0.24% in October, the largest unrounded monthly uptick since April. This bump brought the 12-month rate to 2.6%, the first annual acceleration since inflation’s hot streak in Q1. Perhaps most discouraging is the stickiness in core services. Services prices excluding energy have posted monthly gains between 0.3% and 0.4% in each of the past four months. Shelter inflation picked up in October, driven by hikes in both rent and owners’ equivalent rent. Outside of shelter, prices rose at a steady clip for airfare, recreation services and motor vehicle maintenance and repair, which was partially offset by lower costs for motor vehicle insurance.
Zooming out, inflation is continuing to progress lower, but the last mile is looking harder to achieve. First, the goods sector is no longer the deflationary force it once was. Despite going essentially unchanged in October, core goods prices rose on an unrounded basis for the second month in a row (+0.05%), driven by a 2.7% jump in used vehicle prices. Second, although shelter prices are calming on an annual basis, the expected disinflation in shelter remains painfully slow. Elevated producer prices further complicate the ride back down to 2%. The Producer Price Index (PPI) rose in line with consensus expectations, but sturdy price growth in PPI subcomponents like portfolio management and airline passenger services present some upside risk to the Fed’s preferred inflation gauge in October.
Looking ahead, slower wage growth, higher productivity growth and more price-sensitive consumers should continue to gradually reduce price pressures. That said, slower progress on inflation in recent months may prompt the Fed to reevaluate its pace of easing moving forward. Add to that the prospects of a tariff-driven inflationary rebound, and the Fed is likely to exercise more caution in its monetary policy decisions next year.
Elsewhere, the Fed’s first rate cut in September already seems to have improved borrowing conditions for small businesses. The NFIB Small Business Optimism Index rose 2.2 points in October alongside a dip in the regular interest rate paid by borrowers. The survey revealed a notable improvement in economic expectations, with the net share of firms expecting the economy to improve over the next six months reaching its highest level in nearly four years. But looking past headline optimism, current small business conditions appear shaky at best. The survey question gauging sales activity in October plummeted to its weakest reading since July 2020. Hiring plans also continued to stall, remaining essentially unchanged since May. Price pressures are still a challenge in certain industries, like construction, faced with high costs and scarcer labor supply.
Lower interest rates are also expected to create a more favorable environment for U.S. production. Overall industrial production dipped 0.3% in October after a downwardly revised 0.5% slide in September. Hurricanes and labor strikes exerted some drag, but the Fed estimates the impact was minimal. In the broader sense, industrial production has been struggling for some time and is up by less than 3% since 2017. The reality is even worse for manufacturers. As discussed in Topic of the Week, manufacturing output has been treading water amid the high interest rate environment. Manufacturing production has declined in three of the past four months and sits 1.5% below its 2017 level. The silver linings of October’s report, if there are any, are that the drop in IP was less harsh than expected and utilities and mining were able to eke out slight gains.
To cap off the week, October’s retail sales report gave us a first look into consumers’ headspace heading into the holidays. Overall retail sales surpassed expectations with a 0.4% over-the-month increase. September’s data were also revised to double its original strength, likely to prompt upward revisions to Q3 GDP growth. Resilience to date can be explained by robust consumer income, which itself was revised substantially higher in this year’s annual NIPA revisions. With this in mind, the 0.1% giveback in control group sales in October is not terribly concerning. The strong finish to Q3 puts consumers on track for decent spending in Q4, but the days of extraordinary leaps are likely behind us. Our current forecast has holiday sales rising 3.3% over last year, which would more or less represent a return to "average."
This Week's State Of The Economy - What Is Ahead? - 14 October 2020
Wells Fargo Economics & Financial Report / Oct 14, 2020
The global mobility playing field is equalizing. Major European countries such as Germany and France have seen a slowdown in recent weeks, leaving them right in line with the United States relative to the January baseline.
How Long Can US Businesses Remain Shut Down?
Wells Fargo Economics & Financial Report / Apr 29, 2020
The sudden stop in economic activity caused by the COVID-19 pandemic means that many businesses will need to rely on their cash reserves to survive the next few months.
This Week's State Of The Economy - What Is Ahead? - 02 August 2024
Wells Fargo Economics & Financial Report / Aug 06, 2024
The July employment report brought with it a crossing of the Sahm Rule threshold. That means we\'re either headed for recession, or about to break yet another recession rule this unique cycle. Either way, the Fed is getting ready to cut.
This Week's State Of The Economy - What Is Ahead? - 12 August 2020
Wells Fargo Economics & Financial Report / Aug 15, 2020
The consumer has been a bright spot in the recovery so far, but with jobless benefits in flux and no clear path for the long-awaited stimulus bill, the support here could fade.
This Week's State Of The Economy - What Is Ahead? - 28 May 2021
Wells Fargo Economics & Financial Report / Jun 08, 2021
This week\'s light calendar of economic reports showed supply chain disruptions tugging a little at economic growth.
This Week's State Of The Economy - What Is Ahead? - 07 August 2020
Wells Fargo Economics & Financial Report / Aug 11, 2020
There were more signs of global recovery this week and PMI surveys improved further across the world.
This Week's State Of The Economy - What Is Ahead? - 18 October 2019
Wells Fargo Economics & Financial Report / Oct 19, 2019
Personal consumption is still on track for a solid Q3, but retail sales declined in September for the first time in seven months.
This Week's State Of The Economy - What Is Ahead? - 05 June 2020
Wells Fargo Economics & Financial Report / Jun 09, 2020
Data this week continued to suggest the U.S. economy hit rock bottom in April. Still, it is a long road to recovery and the pickup in economic activity will be gradual.
This Week's State Of The Economy - What Is Ahead? - 12 June 2020
Wells Fargo Economics & Financial Report / Jun 13, 2020
Lock downs began to be lifted across most of the country by the end of May and the total amount of daily new coronavirus cases has been trending lower. But the flattening case count has not been consistent across the country.
This Week's State Of The Economy - What Is Ahead? - 21 August 2020
Wells Fargo Economics & Financial Report / Aug 18, 2020
Despite indications of lost momentum elsewhere, residential construction activity is picking up steam.
