Cyclical inflation pressure “intensifying” in US, CPI up 0.4% in September

Summary: US CPI increases by 0.4% in September, more than 0.3% expected; “core” rate up 0.2%, in line with expectations; supply disruptions continuing to lift prices; non-energy services main driver of headline rise; shelter data “concerning”; cyclical inflation pressures “intensifying”.

The annual rate of US inflation as measured by changes in the consumer price index (CPI) halved from nearly 3% in the period from July 2018 to February 2019. It then fluctuated in a range from 1.5% to 2.0% through 2019 before rising above 2.0% in the final months of that year. Substantially lower rates were reported from March 2020 to May 2020 and they remained below 2% until March of this year.

The latest CPI figures released by the Bureau of Labor Statistics indicated seasonally-adjusted consumer prices increased by 0.4% on average in September. The result was higher than the 0.3% consensus expectation and August’s 0.3% rise. On a 12-month basis, the inflation rate rose from August’s seasonally adjusted reading of 5.2% to 5.4%.

“Headline” inflation is known to be volatile and so references are often made to “core” inflation for analytical purposes. Core inflation, a measure of inflation which strips out the more variable food and energy components of the index, increased by 0.2% on a seasonally-adjusted basis for the month. The result was in line with the expected figure but more than August’s 0.2% increase. The annual growth rate remained unchanged at 4.0%.

“Supply chain disruptions are continuing to lift prices, although gains have moderated over the last three months. Used vehicle and airfare prices fell in September after a large three-month climb through June. There were large gains in new car and food prices but a large drop in apparel prices,” said Westpac Head of New Zealand Strategy Imre Speizer.

Shorter-term US Treasury bond yields rose while longer-term yields fell on the day. By the close of business, the 2-year Treasury yield had gained 2bps to 0.36%, the 10-year yield had lost 3bps to 1.54% and the 30-year yield finished 4bps lower at 2.04%.

In terms of US Fed policy, expectations of any change in the federal funds range over the next 12 months have hardened recently. October 2022 futures contracts implied an effective federal funds rate of 0.31%, 23bps above the spot rate.

The largest influence on headline results is often the change in fuel prices. In September, “Energy commodities”, the segment which contains vehicle fuels, increased by 1.2%, adding 0.05 percentage points. However, prices of “Services less energy services”, the segment which includes actual and implied rents, increased by 0.2% and added 0.12 percentage points, making it the single largest contributor to the overall rise.

“The shelter data is concerning. Rents are cyclical and are firming and the end of the eviction moratorium on 4 October may add upward pressure,” said ANZ economist Daniel Been. He added “cyclical inflation pressures in the US are intensifying” when transport services were excluded.

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