VTI - October CPI Report: Cheering Falling Gasoline Prices And Another Likely Fed Rate Pause

2023-11-14 09:25:01 ET

Summary

• The October 2023 Consumer Price Index report showed further deceleration in inflation, with notable reprieve in gasoline prices.
• The pace of shelter's rise also declined. Recent rental trends, however, may complicate the outlook ahead.
• The overall moderation in inflation will likely be viewed favorably by the Federal Reserve.
• While today's report doesn’t necessarily rule out further hikes in the overnight benchmark rate, I believe it makes it more likely than not that the FOMC will continue to remain on hold.

The U.S. Bureau of Labor Statistics ("BLS") just released its monthly report on the Consumer Price Index ("CPI"). Having met expectations, the print will likely be viewed favorably by the Federal Reserve in advance of the Federal Open Market Committee's ("FOMC") next meeting in December.

Markets reacted positively to the data. All three equity indexes ticked higher following the release, with the Dow ( DJI ) and NASDAQ Composite ( COMP.IND ) both up about 300 points. The S&P 500 ( SP500 ) was more muted, but still in the positive. 10-YR Treasury yields (US10Y), which have pulled back from recent highs, ticked lower to 4.50%.

Market observers can utilize the October CPI report as additional support in forecasting another rate pause at next month's FOMC meeting. The American consumer, on the other hand, can cheer falling gasoline prices the most. Here are some more key observations from the October CPI report.

Headline CPI In October

The CPI rose 3.2% from a year earlier, in-line with expectations of a 3.3% increase and lower than the 3.7% reported in September. The YOY rise in core prices, 4.0%, also met expectations. On the month, overall CPI was unchanged and core CPI was up just 0.2%.

In individual categories aside from gasoline and shelter costs, the food index increased 0.3% in October, up from the 0.2% increase reported in each of the last three months. This was comprised of a 0.3% increase in the "food at home" index and a 0.4% increase in the "food away from home" index. Notable drivers at the grocery store included pork, fish, and eggs, with the index for beef rising 1.2% and the index for pork up 1.3%.

Prices for used vehicles continued their persistent fall, down another 0.8% in October, following a 2.5% decrease in the month prior. Prices are now down 7.1% in the last twelve months. This contrasts with new vehicle prices, which are still up 1.9% YOY, though there was a reprieve in October, with a 0.1% decline following increases in prior months.

Transportation costs remain elevated, up 9.2% in the last twelve months. In October, prices were up 0.8%. This follows a 0.7% increase in September. Consistent with prior months, vehicle ownership costs remain the primary culprit in the transportation category.

Insurance and repair costs, for example, were up 19.2% and 15.1% on a YOY basis in October. While airfare is providing some reprieve on a YOY basis, prices have been on the uptick in recent months. Travelers did, however, receive some relief in October, as prices declined 0.9% on the month.

A Reprieve In Gasoline Prices

American consumers were stung by higher gasoline prices through the summer months, particularly in August, where overall energy prices were up 10.5% on the month. Following another 2.3% increase in September, consumers finally realized a reprieve in October. On the month, the index fell 4.9%

Recent reporting from AAA noted that the national average for a gallon of gas was $3.40, down 30 cents from the prior month and 40 cents on a YOY basis. While still well-above pre-pandemic levels, the decline ahead of the pending holiday season is a welcome relief.

Looking ahead, prices could stand to fall further, as a barrel of oil is now quoted in the mid-$70 range, down $10 from levels reported a week ago. Driving the declines is a combination of a strengthening dollar and reduced concerns regarding a wider conflict in the Middle East.

Additional Support From Declining Shelter Costs

In September, the shelter index surprised to the upside with a monthly increase double that reported in the month prior. The component was also driven higher by a 3.7% increase in the lodging away from home index, a notable spike given the steady declines in the index over the prior three months.

Prices were more tame in October, with the index rising 0.3% during the month. While shelter's contribution to overall inflation is still material, observers should expect a sizeable disinflationary trend in the months ahead.

To date, the index has lagged Zillow's asking rent index, a leading indicator which I have elaborated on in prior commentary . In the periods ahead, I expect the shelter component to exhibit a decline reflective of the declines seen previously in the asking rent index.

While a decline is expected, it's worth noting that Zillow's most recent asking rent report reported its first annual increase since the pandemic peak in February 2022. In October, rents were 3.2% higher than last year, a slight acceleration from September's 3.19% change. While it's likely too early to determine if this represents the beginning of a new trend, the increase is noteworthy given the nearly two-year slowdown in rental growth.

How The October CPI Report May Impact The Federal Reserve

The next two-day FOMC meeting is set for December 12th & 13th. Prior to the decision, the committee will have the November CPI print in hand, as it is set for release on December 12th. Given timing, today's October reading will likely carry more weight for their decision, in my opinion.

And based on today's release, the Fed will likely remain on pause when the rate decision is revealed. While several categories, insurance-related costs especially, remain persistently elevated, overall inflation is tracking in the preferred direction.

Interest rate traders, according to data from CME Fed Watch , currently assign a 85.7% probability that the Fed will remain on hold in December. This is realistic, in my view, and is supported by today's data on the October CPI.

My Final Takeaway

Recent data on the CPI clearly suggests peak inflation has passed. While a resurgence can never be ruled out, it appears unlikely at this point. To the welcome relief of the American consumer, gasoline prices have been on the mend over the past month. And a further decline ahead of the holiday season is likely, supported by a stronger dollar and subdued concerns regarding broader escalation in the middle east.

The decline in gasoline costs should translate to declines elsewhere, as gasoline is a key input into numerous categories in the core index. That said, the index is inherently volatile and new developments at home or abroad could quickly reverse the trajectory of prices, to the dismay of the American traveler.

Stickiness in key categories such as in insurance and other vehicle ownership costs is also an issue that complicates the Fed's goals of attaining their 2% target. Long-term inflation expectations , as reported by the New York Fed, of about 2.7% creates another wrinkle.

But all considered, the current report likely provides justification to the Fed to remain on pause at their meeting next month. Sure, inflation is still above target. But it continues to track in the right direction. Chairman Powell recently poured cold water over any optimism surrounding a complete end to their rate campaign. While this suggests the threat of another increase is ever-present, observers could at least take relief in the modest readings of the October CPI report.

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