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US CPI Preview: October 2023
Annual headline CPI growth expected to fall materially, but the core CPI could deliver an upside surprise
Headline CPI growth expected to fall to 3.3% YoY
With a relatively large prior comparable being cycled out of the YoY equation, and with a significant decline in regular gasoline prices (-5.6% MoM) putting downward pressure on monthly CPI growth, I expect the headline CPI’s annual growth rate to moderate to 3.3% in October, down from 3.7% in September. My 3.3% forecast is in-line with the consensus estimate.
Note that on a two-decimal place basis, my forecast is 3.35%, indicating the potential for growth to come in a 3.4%.
Core CPI growth expected to rise for the first time since March
For the first time since March, I expect the core CPI’s annual growth rate to rise — from 4.1% in September, I expect annual core CPI growth to hit 4.2% (4.23%) in October.
While this is only a modest increase, the potential shift to higher MoM growth (including the potential for growth to round to 4.3%), particularly when the consensus forecast is at 4.1%, has the potential to negatively impact market sentiment and its interest rate outlook.
While subject to change, given that I currently expect the core CPI to record largely flat YoY growth for several additional months to come, Fed and market interest rate expectations could shift materially further towards a “higher for longer” view over the months ahead — for more detail, see my latest medium-term US CPI forecast.
Spot market rent adjusted CPI inflation expected to remain below 2% in October
While my current medium-term US CPI forecast has spot market rent adjusted headline and core CPI inflation rising above 2% in December and November respectively, I expect both measures to remain below 2% in October.
On a spot market rent adjusted basis, I forecast headline CPI growth of 1.5%, down from 1.7% in September, and core CPI growth of 1.8%, up from 1.6% in September.
Note that as outlined below, and in further detail in my latest medium-term US CPI forecast, I have altered the manner in which I produce this index — instead of just using Apartment List data, I now use a simple average of both Apartment List and Zillow data. This has had the effect of increasing the most recent recorded rate of YoY growth.
Breaking down the forecasts in greater detail
Wholesale prices point to a rise in CPI used car & truck prices — but there are important offsetting factors
When forecasting the potential move in CPI used car and truck prices, it’s important to note that the CPI used car and truck index, which tracks retail prices, tends to lag the Manheim Used Vehicle Value Index, which measures wholesale prices, by two months.
August’s change in wholesale used car prices thus points to a 0.9% increase in CPI used car and truck prices in October — though there’s important offsetting factors to consider.
Firstly, from June to August, CPI used car and truck prices rose at a materially faster rate/fell at a materially slower rate, than the move implied by a 2-month lag of the Manheim Index. This has resulted in a significant gap opening up between retail and wholesale used car prices. While some of this gap was bridged by the very large MoM decline in CPI used car and truck prices in September, it remains material.
Given that this gap would be expected to close over time, it suggests that CPI used car and truck prices may rise by a lesser amount than that suggested by the Manheim Index.
Secondly, October tends to be a relatively weaker month for retail used car prices versus a 2-month lag of the wholesale price index (2010-22 average of -0.9%).
Given these two factors I am forecasting MoM growth for CPI used car and truck prices of 0.5% versus the implied 0.9%. While the historical October deviation suggests a material likelihood of even weaker MoM growth, given the larger relative decline in September, which indicates the potential for some pulling forward of price declines, I have chosen to take a more conservative forecast for October.
Food prices expected to keep decelerating — 2% growth in reach for CPI food at home prices
CPI food at home prices are expected to record their 13th consecutive month of decelerating YoY growth in October, falling to an annual growth rate of 2%, down from 2.4% in September.
This deceleration comes on the back of falling underlying food commodity prices, which were down 10.9% YoY in October.
While more lagging on account of their greater services related focus, CPI food away from home prices have also been decelerating and are expected to do so again in October, with YoY growth forecast to fall to 5.2% — a significant decline from the 6.0% recorded in September.
This comes as MoM growth has moderated significantly in recent months, and as the last very high prior comparable is set to be cycled.
While annual price growth is expected to moderate further over the months ahead, the cycling of the last very high prior comparable in October means that the pace of the moderation in YoY growth, which has been drastic over recent months, is likely to slow from November.
A huge drop in the CPI energy commodities index expected on the back of falling gasoline prices
While the large increase in oil prices that was seen from July to September garnered notable attention, the continued decline in RBOB gasoline (wholesale) prices — which has been very significant — appears to have gone somewhat under the radar.
The decline in wholesale prices has been translating through to retail gasoline prices since October, with regular average all formulations gasoline prices seeing a monthly fall of 5.6% in October according to data from the AAA. This is expected to drive a major fall in the CPI energy commodities index, which tends to relatively closely reflect the change in monthly average regular gasoline prices.
Gasoline prices have continued to fall in November. After averaging $3.62 a gallon in October, national average gasoline prices fell to $3.365 on 13 November.
Apartment List data continues to point to a moderation in underlying spot market rents
While CPI owners’ equivalent rent (OER) (up 7.1% YoY in September) and rent of primary residence (RPR) (up 7.4% YoY in September) continue to record materially elevated growth, the Apartment List Rent Index (ALRI) continues to record below average growth.
For the seventh consecutive month, and for the 12th time in the past 14 months, MoM growth for the Apartment List Rent Index (ALRI) has been below its 2017-19 average. On a YoY basis, growth was -1.2% in October.
Adopting a new approach to spot market rent adjusted CPI measurement
Given the huge importance of the CPI’s rent based measures to the overall CPI, and the large divergence in annual growth that currently exists between spot market rent based measures and the CPI’s rent based measures, for some time now, I have been providing a measure of spot market rent adjusted CPI growth in order to gain a better picture of underlying inflation.
Until now, these spot market rent adjusted inflation measures have been based on Apartment List data. Though upon further review, and as detailed in my latest medium-term US CPI forecast update, I have decided to now also include data from the Zillow Observed Rent Index (ZORI), combining the two measures of spot market rental prices in an equal weighted simple average.
The reason for this change, is that the ALRI has a tendency to record a lower rate of growth than the CPI’s rent based indexes, while the ZORI has a tendency to record a higher rate of growth than the CPI’s rent based indexes.
By combining these two measures, I thus expect that this will provide a measure that better reflects underlying CPI growth.
As a result of this shift, September’s annual spot market rent adjusted headline CPI growth changed from 1.0% to 1.7%.
For the core CPI, annual spot market rent adjusted growth for September changed from 0.7% to 1.6%.
Motor vehicle maintenance price growth moderated in September … but we’ve seen this before
An important item to watch in October will be CPI motor vehicle maintenance prices.
Generally seeing high MoM growth since 2H22, which has resulted in average YoY growth of 12.4% over the past 12 months, MoM price growth was 0.1% below its 2010-19 average in September.
This was the first month of below average growth that has been seen since March 2022 and marked a drastic turnaround from MoM growth that was an average of 1.0% above its historical monthly average over the past 3 months.
Whether or not this marks a sustained turnaround remains to be seen, with additional data needed to suggest that a new trend is taking shape — as a result, I continue to forecast materially elevated MoM growth for October.
Reinforcing the need for caution, is that a moderation in MoM growth was seen earlier this year, only to later reverse back higher — MoM price growth largely fell to its historical average in February, and while still materially above its historical average in March and April, it was significantly less so than had been seen from June 2022-January 2023. Despite this period of relatively more moderate growth, price growth subsequently returned to very high levels across June to August.
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