NAA Inflation Tracker: November 2023

CPI, Latest Release, October 2023  

October CPI inflation figures came in slightly below expectations, remaining flat from last month, and increasing 3.2% year-over-year, seasonally adjusted. Price stability was led by declines in energy prices, including a 5.0% drop in gasoline. Core CPI rose 4.0%, its lowest rate of increase in two years. Prices rose 0.2% over the month, driven by increases in transportation costs (0.7%) and shelter costs (0.6%). Prices declined for used cars and trucks (-2.5%) and apparel (-0.8%).  

 

CPI for Housing, October 2023 

The CPI includes two measures for shelter costs: owners’ equivalent rent and rent of primary residence, both of which are self-reported. Together, they comprise about one-third of CPI. Both measures increased by the lowest rates in more than a year, with rent up 7.2% and owners’ equivalent rent up by 6.8%, year-over-year. Monthly increases have been stubbornly elevated, between 0.4% and 0.6% for the past eight months, but are well off peak levels seen during the second half of last year. Shelter measures can be expected to continue their steady decline in the coming months, lagging private data by a year or more. 

 

“Super Core” Inflation, October 2023 

Due mainly to lags in CPI shelter data, the Fed has begun to focus more on “super core” inflation, that is, prices excluding food, energy and shelter. Super core inflation increased by just 2.0% year-over-year, matching last month’s level. Prices in this special aggregate index were up 0.1% from last month, due mainly to motor vehicle insurance (1.9%) and tobacco products (1.9%). Prices fell for physicians’ services (-1.0%) and airline fares (-0.9%)

 

Inflation Expectations, October 2023 

The Fed tracks 21 different measures of inflation expectations. The data presented in the chart below are inflation expectations one year from now from the Federal Reserve Bank of New York’s Survey of Consumer Expectations and the University of Michigan’s Consumer Sentiment Index.

The University of Michigan Index reversed course from last month and rose 100 basis points, the highest level since May of this year, driven by expectations for higher gas prices. The Fed’s index has been in a tight range of 3.5%-3.7% for the past four months. Consumers expect prices to increase over the next twelve months for medical care, college tuition and gas; and to remain flat for rent and food.  

 

Wage Growth vs. Employment Cost Index, Q3 2023

The Employment Cost Index (ECI) is a quarterly measure of the change in the costs of labor. Unlike average hourly earnings, the series typically used for wage growth, the ECI calculation is not impacted by the change in employment levels among occupations and industries which can significantly skew wage levels. It also includes the costs of benefits to employers. The ECI is considered a purer measure of labor costs and is closely watched by the Fed. 

For the past 4 quarters, the ECI has been outpacing wage increases, rising 4.4% in Q3 2023. This rate of growth is double the pre-pandemic 10-year average. This slow move, even though it’s in the right direction, tells us that the Fed’s 2% target is still a long way off. 

 

What to Watch in the Next Month 

• This month’s employment report and CPI release were viewed positively by equity markets, which are now pricing in no further rate increases, according to the CME Group’s FedWatch Tool.  
• Projections for timing of rate cuts vary widely, with Moody’s Analytics’ latest baseline forecast calling for the first cut in the second half of 2024, while others are anticipating it much sooner. The Fed needs to see further cooling in wages and employment costs before taking any action that could potentially cause inflation to reverse course for an extended period of time. 

Next Tracker: December 12, 2023