What To Expect From The October CPI Report

The Consumer Price Index Report for the month of October will be released at 8.30am ET. on November 14. Headline inflation is broadly expected to be subdued month-on-month. That’s in part as oil prices have eased from late September highs.

Still, underlying trends may still concern the Federal Reserve ahead of their next scheduled interest rate decision on December 13. Inflation is likely to remain in the 3% to 4% range, and though down from peak levels, it remains materially above the Fed’s 2% annual inflation target. However, the market does not expect CPI figures to generate enough concern at the Fed to prompt an increase short-term interest rates this December.

Inflation Nowcasts For October 2023

Nowcasts from the Cleveland Fed, which use current prices for items such as energy to estimate monthly inflation rates, currently predict that CPI will rise at a 0.07% monthly rate for October. Core CPI, which strips out food and energy prices, is estimated to rise at a relatively faster rate of 0.34% month-on-month.

The Fed’s Reaction

Overall, should this forecast hold, the Fed will be disappointed not to see more progress on core inflation, especially at a time when certain prices such as non-energy commodity prices and used cars have been falling in price, helping pull inflation a little lower.

However, the question remains how the Fed will balance the trade-off between patiently holding rates high and waiting, compared to hiking interest rates further to bring inflation down more aggressively.

With some early signs of a 2024 recession, the Fed may be reluctant to hike rates from the current target rate of 5.25% to 5.5%, though they have clearly stated it’s a possibility. The Fed last raised rates on July 16, and fixed income markets now implicitly predict that further interest rate increases are over, even if rates take some time to fall in 2024.

As much as the Fed does not want a recession, cooling economic growth, would likely help bring down pricing in many categories, helping the Fed get closer to its inflation target.

What To Watch For In October’s CPI Data

Within the CPI report, trends for shelter costs will be key. Housing carries a large weight in the series. After shelter costs rose at a slower rate than previously for much of 2023, September’s data saw a monthly spike for a 0.6% cost increase for shelter month-on-month. It remains to be seen if that spike was more of a one-off, or the start of a more unwelcome trend for those hoping for disinflation in housing.

If inflation is to ease further from here, then some assistance from shelter costs will likely be needed. That’s because shelter costs are the largest single category in the CPI data, carrying a 35% weight and costs here have risen 7.2% from September 2022 to September 2023. That makes shelter costs a very large contributor to the current rate of inflation.

Elsewhere, energy prices are broadly expected to drop back as oil prices moved generally lower in October compared to September’s peak. That should help move headline inflation down too. Still, the Fed tends to look through volatility in energy prices, and will likely pay more attention to data with energy pricing removed.

Services prices will also be watched closely. This spans a broad range of categories from travel to medical care, but a main them is wage costs being a key component of costs and the Fed is watching to see to what extent cooling wage growth is reflected in pricing for this category.

What To Expect

Overall, despite encouraging headline numbers, October’s CPI report may reinforce concerns that annual inflation returning to 2% will take considerable time, especially if shelter costs continue to rise materially. That said, for now, the Fed may be comfortable holding interest rates where they are, especially in the context of arguably rising recession risks for 2024. Therefore, despite encouraging headline inflation numbers, under the surface, October’s CPI data may be disappointing for the Fed. Still, CPI figures are unlikely to be sufficiently bad so that the Fed elects to increase interest rates this December.