Inflation cools more than expected in October

The Consumer Price Index cooled more than expected in October: it rose 7.7% from a year earlier, down from 8.2% the prior month, the Labor Department said on Thursday.

Why it matters: Inflation still remains painfully high, but a bigger-than-expected easing in price pressures for items like used cars and apparel helped pull the overall index down.

By the numbers: On a monthly basis, CPI rose 0.4%, the same pace as September.

  • Core CPI, a closely watched gauge that strips out volatile food and energy costs, eased in October. On a monthly basis, it rose 0.3% — up 6.3% from a year ago.
  • In September, those figures were 0.6% and 6.6%, respectively.

Catch up quick: Soaring costs have eroded many Americans’ wage gains, souring their view on the economy that has otherwise held up.

  • Supply chain problems have led to shortages of vehicles and other consumer goods, which pushed up prices. Russia’s invasion of Ukraine has created a volatile backdrop for energy costs.
  • Those supply chain pressures have eased and consumers have dialed back demand for goods, pushing prices down. But costs for services have raced ahead.

Where it stands: The Fed has raced to try to get inflation under control, raising interest rates at a historic clip.

  • In recent months, inflation data has surprised to the upside. That’s kept officials on an aggressive path to slow the economy down, with the hope inflation will follow suit. Those moves have risked throwing the economy into a recession.

Inflation drops to zero in July due to falling gas prices

Consumer prices were unchanged in July, as plunging prices for gasoline dragged the Consumer Price Index down to zero. Core inflation, which excludes energy and food, rose only 0.3%, below what analysts expected.

Driving the news: The Labor Department reported that overall consumer prices rose 0% last month, and are up 8.5% over the past year. That compares to a 9.1% year-over-year reported in June.

Why it matters: Falling gasoline prices are clearly giving American consumers some inflation relief, and the broader inflation picture was more favorable in July than economists had expected.

By the numbers: Gasoline prices fell 7.7% in July, dragging down headline inflation. Other items with falling prices included used cars and trucks (-0.4%) and airfares (down 7.8%).

  • But rents kept rising, a major factor in stubbornly high underlying inflation. Renters faced a 0.7% rise in costs.

What’s next: The Federal Reserve has indicated it intends to keep raising interest rates until there is clear evidence inflation is waning. After two straight months of extremely hot inflation readings, this report will be welcome news.

Business forecasters see inflation heating up to 5.1%

Dive Brief:

  • Inflation as measured by the consumer price index will surge 5.1% year-over-year during the fourth quarter, forecasters for the National Association for Business Economics (NABE) said, raising their estimate in May for a 2.8% year-over-year increase in prices. The forecasters anticipate inflation will ease to 2.4% year-over-year during the fourth quarter of 2022, according to a survey.
  • “Inflation expectations have moved up significantly from those in the May 2021 survey,” according to Holly Wade, survey chair and executive director for the research center at the National Federation of Independent Business. “But panelists anticipate inflation will ease in 2022.”
  • The NABE panel reduced its estimate for growth in gross domestic product (GDP) this year to 5.6% from 6.7% in May, citing the coronavirus delta variant as the biggest risk to the expansion.

Dive Insight:

NABE expectations that inflation will cool next year align with the view of Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen. Both policy-makers have staked record stimulus in part on the premise that the fastest price gains in decades will slow as pandemic-induced kinks in supply chains even out.

The Fed’s preferred inflation measure — the core personal consumption expenditures price index — rose 3.6% in July compared with a year earlier, well above the central bank’s 2% target.

In an estimate released after a two-day meeting on Wednesday, Fed officials forecast that so-called core inflation will rise 2.3% next year, slightly above the 2.2% estimate by the NABE panel.

Confident that inflation will ease, Fed policy-makers indicated after their meeting that they may begin to cut $120 billion in monthly purchases of Treasury and mortgage bonds as early as their next scheduled gathering in November. Powell said that the Fed will gradually taper and may conclude bond buying “around the middle of next year.”

Half of the 18 participants in the Fed’s policy-making committee expect to raise the benchmark interest rate from a record low by the end of 2022.

“I expect inflation to decelerate,” Fed Governor Lael Brainard said Monday in a speech to NABE. “But with delta disrupting the rotation from goods to services and prolonging supply bottlenecks, it is uncertain just how fast and how much inflation will decelerate over the remainder of the year and into next year.”

With the delta variant disrupting demand and supply, the employment report for September due out on Oct. 8 “may be weaker and less informative of underlying economic momentum than I had hoped,” she said.

More than half (58%) of the NABE forecasters see downside risks to economic growth for the remainder of 2021, while 16% “expect the balance to be to the upside — a complete reversal from the May survey results,” Wade said.

Sixty-three percent of panelists identify the delta variant as the leading risk to growth, while 5% of respondents said fiscal policy inaction or gridlock as their greatest growth concern, NABE said. Two-thirds (67%) of survey respondents predict that nonfarm payrolls will return to pre-pandemic levels by the end of 2022.

Powell and Yellen will have an opportunity to update their views on inflation and the economy, and the outlook for record monetary and fiscal stimulus, in testimony scheduled for Tuesday before the Senate Banking Committee.

The NABE panel of 47 forecasters spans a range of organizations, including economists from Ford, Grant Thornton, Moody’s Analytics, the Conference of State Bank Supervisors, Nationwide Insurance, Morgan Stanley, the National Association of Homebuilders, Visa and Wells Fargo.