“Broad-based rise in prices” from US CPI report

Summary: US CPI increases by 0.9% in October, more than 0.6% expected; “core” rate up 0.6%, above expectations; broad-based rise in prices, “challenges” transitory factors notion; fuel prices, rents, vehicles main drivers of headline rise; data “stokes” concerns of upside risk.

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 this year.

The latest CPI figures released by the Bureau of Labor Statistics indicated seasonally-adjusted consumer prices increased by 0.9% on average in October. The result was higher than the 0.6% consensus expectation as well as September’s 0.4% rise. On a 12-month basis, the inflation rate accelerated from September’s seasonally adjusted reading of 5.4% to 6.2%.

“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 0.6% on a seasonally-adjusted basis for the month. The result was larger than the expected figure of +0.4% as well as September’s 0.2% increase. The annual growth rate increased from 4.0% to 4.6%.

“Details in the report revealed a broad-based rise in prices, challenging the notion that higher inflation is just a function of transitory factors,” said NAB currency strategist Rodrigo Catril.

US Treasury bond yields declined a little on the day. By the close of business, the 2-year Treasury yield had slipped 1bp to 0.51%, the 10-year yield had shed 2bps to 1.55% while the 30-year yield finished 1bp lower at 1.91%.

In terms of US Fed policy, expectations of any change in the federal funds range over the next 12 months continued to harden. November 2022 futures contracts implied an effective federal funds rate of 0.57%, 49bps above the spot rate.

The largest influence on headline results is often the change in fuel prices. “Energy commodities”, the segment which contains vehicle fuels, increased by 6.1%, adding 0.25 percentage points. Prices of “Services less energy services”, the segment which includes actual and implied rents, increased by 0.4% and “Services less energy services” increased by 1.0%. These two categories added 0.23 percentage points and 0.21 percentage points respectively.

“Since last week’s FOMC meeting, Fed speakers have argued that the risks to inflation lie to the topside. The October data certainly stoked that concern and it seems inevitable that there will be further upward creep in inflation forecasts and the dot plot when the Fed releases its Summary of Economic Projections next month,” said ANZ economist Daniel Been.

The Federal Reserve Bank of New York publishes an unofficial estimate of underlying inflation, known as the Underlying Inflation Gauge (UIG) and it was updated at the same time as the CPI figures. While the Federal Reserve states the UIG does not represent an official estimate, the UIG does appear to lead the core CPI measure.October’s UIG registered an annual rate of 4.3%, up from September’s figure of 4.0%.

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