Have We Passed the Peak of Inflation?

Inflation eased in October; however, price pressures have shifted from goods to services, which take longer to let up.

November 11, 2022

ALEXANDRIA, Va.—Inflation slowed down last month, indicating pressures on the U.S. economy may be cooling, reports the Wall Street Journal. The consumer-price index (CPI) was up 7.7% in October year over year, down from 8.2% in September and the four-decade high of 9.1% in June.

Core CPI, which excludes energy and food prices, was up 6.3% year over year, and a decrease from September’s 6.6% reading, which was the biggest increase since August 1982. Investors and policymakers keep a close eye on this index as it’s a reflection of broad, underlying inflation and a predictor of future inflation.

CPI rose 0.4% last month from September, which was the same pace as the previous month, while core CPI rose 0.3% month over month, down from 0.6% in both September and August.

“It’s pretty clear that inflation has definitely peaked and is rolling over. All the trend lines suggest that it will continue to moderate going forward, assuming that nothing goes off the rails,” Mark Zandi, chief economist at Moody’s Analytics, told CNBC.

Month over month, used car and truck prices went down 2.4%, airline fares were down 1.1%, and apparel declined 0.7%. Medical care services were down 0.6%.

Housing was up 0.8% over September, the largest monthly gain since 1990, and up 6.9% year over year, their highest annual level since 1982. Housing makes up about one-third of the CPI, and the sector adjusts slowly because leases are usually determined on a yearly basis. That lag means housing costs could keep core CPI high for months.

“Because market rent increased so dramatically, landlords have been more likely to push really hard for increases. They’re OK allowing one or two months of vacancies because it’s still more profitable,” Tiffany Wilding, North American economist with bond fund Pimco, told the Journal. That, together with high mortgage rates making homes harder to buy, “means we’ve really seen rents take off, and it takes time to come back down.”

Fuel oil prices were up 19.8% month over month and were up 68.5% year over year.

The price of gasoline “doesn’t look as challenging as it was in the second quarter of this year, but energy remains a wild card when it comes to inflation,” Blerina Uruci, U.S. economist at T. Rowe Price, told the Journal.

Food costs were up 0.4% in October, which was the smallest gain since December 2021, while the cost to go to a sit-down restaurant increased 1.1%—the sharpest increase since records began in 2001.

According to the Journal, gas and food costs are a major factor in shaping people’s expectations for future inflation, which can become self-fulfilling.

Price pressures have moved from goods to labor services now that the COVID-19 pandemic has eased, causing prices to remain high, as labor services, such as housing and medical care, take longer to slow down. Mortgage rates fell yesterday after the Labor Department released the CPI numbers. The average rate on the 30-year fixed decreased 60 basis points from 7.22% to 6.62%; however, the rate is more than double what it was at the beginning of the year.

“Early on, goods prices were driving that increase, but more recently it’s services prices, and that likely reflects the very tight labor market,” Brett Ryan, senior economist at Deutsche Bank, told the Journal.

Last month, U.S. employers added 261,000 jobs in October, and although that is a strong number, it’s the least amount of added positions since December 2020. Unemployment increased to 3.7%, up 0.2 percentage point over September. The unemployment rate has shifted between 3.5% and 3.7% since March.

Wages increased last month, rising 0.4% from September to October. However, wage growth slowed on an annual basis, up 4.7% in October year over year, down from 5% in September. Wage gains have been weakening since their peak in March at 5.6%, but they are well above pre-pandemic levels, reports the Journal.

“The earnings numbers in these data are still not consistent with 2% inflation,” Boston Fed President Susan Collins told the Journal, referring to the U.S. Federal Reserve’s target level. “There’s clearly more work to do there.”

Earlier this month, the Federal Reserve raised interest rates by 0.75%—its fourth consecutive hike of that amount. Markets are anticipating a lower rate increase by the Fed during their meeting in December. Futures tied to the fed funds rate indicated an 80.6% probability of a 0.5 percentage point increase, according to CNBC.

“One data point doesn’t make a trend. What we have to hope for is we get another downtick [in CPI] with the next report, which happens the day before the next Fed meeting,” Randy Frederick, managing director of trading and derivatives at Charles Schwab, told CNBC. “Markets are poised to respond to anything remotely positive. ... It’s kind of like a coiled spring more than anything else.”

The markets reacted sharply to the CPI report, with the Dow Jones Industrial Average up more than 1,000 points. Treasury yields fell sharply, with the policy-sensitive two-year note tumbling 0.3 percentage point to 4.33%.

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