US CPI Review: September 2023

Both the CPI & core CPI were in-line with my forecasts, as durables and nondurables prices saw broad disinflation, but services prices remained elevated.

Executive summary

In September, headline CPI inflation was 3.7%, unchanged from August. While this was slightly above the consensus forecast, it was in-line with my forecast.

Core CPI inflation was 4.1%, down from 4.3% in August. This was in-line with my forecast and consensus expectations and marked the sixth consecutive month of decelerating annual growth.

Note that unless otherwise stated, my CPI analysis is conducted using non-seasonally adjusted data.

On a spot market rent adjusted basis, the headline CPI came in at 1.0%, unchanged from last month and in-line with my forecast. On a core basis, spot market rent adjusted inflation fell to 0.7%, from 0.9% in August (versus my estimate of 0.8%).

MoM growth for the headline CPI was 0.25%, which in comparison to the relevant 2010-19 monthly average, was the softest growth that has been seen since May.

MoM growth in the core CPI was 0.23%, virtually in-line with its historical average for September. This marked the fifth consecutive month of a relative moderation in growth, and the softest relative reading seen since September 2021.

Looking into the CPI’s key components, durables prices fell 1.3% MoM — the largest decline ever recorded in the history of this data series, which dates back to 1956.

This decline was driven by a very large decline in used car & truck prices (-5.6% MoM), reversing the recent trend of relatively stronger retail used car prices.

While annual nondurables price growth increased to 3.2% in September as the CPI energy commodities index recorded MoM growth for the fourth consecutive month, other key nondurables components disinflated. This includes both food at home and food away from home prices, while apparel price growth also moderated significantly in September. Upward pressure from gasoline prices is also likely to reverse materially in October, with AAA data showing that as of 17 October, monthly average regular gasoline prices are down 3.7% versus September.

Turning to the services category, overall adjusted core services prices (i.e. excluding lagging shelter, indirectly measured health insurance (which is artificially lowering the CPI), and inconsistently measured household operations) saw a moderation in MoM growth, but it continues to be materially above the historical average. Within this category, motor vehicle insurance remains extremely elevated, while recreation services and other personal services continue to see inconsistent trends, with both of these measures seeing materially elevated growth in September.

While the CPI’s rent based measures saw a material acceleration in MoM growth, smoothing out the volatility of MoM movements via a 3-month moving average, shows that a downtrend remains — given the importance of a continued deceleration in the CPI’s rent based components to achieving 2% CPI growth, it’s important that they are watched closely over the months ahead.

On net, the latest CPI report didn’t tell us much that we didn’t already know: durables and nondurables prices have broadly disinflated, but core services price growth remains elevated, which will continue to encourage tight monetary policy from the Fed.

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Durables

Used car prices see a major fall

As outlined in my US CPI Preview, over the last several months, a material gap had opened up between retail and wholesale used car prices (as per the Manheim Index), with retail prices proving relatively more resilient.

In September, this trend came up against what is historically the weakest month for CPI used car & truck prices, making the quantum of September’s expected movement difficult to predict.

While I ultimately forecast a a larger decline than implied by the Manheim Index on a 2-month lagged basis (a big reversal from the trends seen in the previous three months), the actual decline turned out to be even larger than forecast, with CPI used car & truck prices seeing a MoM change of -5.6% vs my -4.0% forecast.

While this had the impact of somewhat bridging the gap that had opened up between retail (CPI) and wholesale (Manheim) used car prices, a material gap remains.

New car prices see a slight moderation

For the first time in seven months, new car prices recorded a material relative deceleration in their MoM growth, which were 0.1% above their historical (2010-19) average for September, versus MoM growth that was 0.3% above the historical average in August.

YoY growth has now fallen to 2.5%, down from 5.8% at the beginning of the year.

Overall durables prices record the largest MoM decline on record

With other durables prices also seeing a material MoM contraction, overall durables prices fell by 1.3% MoM. While September is a seasonally weak month for durables prices, they aren’t usually this weak — in the history of this data series, which dates all the way back to 1956, this is the largest MoM fall that has ever been recorded.

As a result of this decline, the YoY change has fallen to -2.2%, from -2.0% in August.

Nondurables

Energy commodities rise again in September, but material falls are likely ahead

While the CPI energy commodities index rose 0.9% MoM, the trend is likely to reverse significantly in October, with current monthly average gasoline prices down 3.7% versus September according to AAA data — with current prices suggesting that a further decline in the monthly average for October lies ahead.

Food prices continue to moderate

CPI food at home prices continued to moderate in September, with MoM growth of 0.1% below the historical average for September, marking the second consecutive month of below average growth.

This took YoY growth to 2.4%, down from 3.0% in August. Given the moves that have already taken place in underlying wholesale food commodity prices and recent MoM growth trends, further declines in CPI food at home prices are expected to occur over the remainder of 2023.

MoM growth in CPI food away from home prices was in-line with the relatively more moderate growth that has been seen over the past few months, which allowed for a continued moderation in YoY growth, which fell to 6.0% in September, from 6.5% in August.

Apparel price growth continues to moderate

Another key component of the nondurables category, is apparel. Between January and August, annual growth in apparel prices ranged between 3.1%-3.6%.

Though in September, MoM price growth was much weaker than its historical average. This saw annual price growth plunge from 3.1% in August, to 2.3% in September. This marks the slowest pace of annual growth that has been seen since April 2021.

Energy commodities push overall nondurables higher, but the broader theme remains one of disinflation

Looking at the nondurables index in aggregate, a drastic shift in the CPI’s energy commodities index from YoY growth of -26.8% in June, to 2.2% in September, has put upward pressure on the overall CPI nondurables index, which has seen YoY growth move from -1.3% in June, to 3.2% in September.

Though given that the other major nondurables components of food and apparel are continuing to see their price growth moderate, the broader theme remains one of disinflation, particularly as gasoline prices have once again begun to turn lower in October.

Services

CPI rent based measures accelerate in September, but the broader trend remains downward — this requires close monitoring over the months ahead

MoM growth in both owners’ equivalent rent (OER) and rent of primary residence (RPR) accelerated in September. In comparison to the historical monthly average, OER recorded its highest MoM growth since May, while RPR recorded its second consecutive month of relatively higher MoM growth.

Though smoothing the volatile MoM movement via the use of a 3-month moving average, shows that a broader downtrend remains in place for both RPR and OER. Given the huge decline that has been seen in the annual growth rate of spot market rents (such as that shown by the Apartment List Rent Index), an ongoing gradual moderation in growth is to be expected.

Given the importance of both OER and RPR to the overall inflation equation, with their ongoing moderation largely essential to achieving 2% CPI growth, both of these measures need to be closely monitored over the coming months.

Motor vehicle related expenses show some deceleration

After three consecutive months of very elevated MoM growth, CPI motor vehicle maintenance prices moderated significantly in September, with MoM growth 0.1% below its historical average. This was the first time that MoM growth was below its historical average since March 2022.

While motor vehicle insurance prices continued to grow at an extremely elevated rate (MoM growth was 1% above the historical average for September), it was less extreme than the average across the prior four months (1.5%), and the most modest relative price increase since April.

Recreation & other personal services prices accelerate

The frequent shifts between relatively high, moderate and low MoM growth in CPI recreation services prices continued in September, where after a month of below average growth in August, MoM growth was 0.4% above its historical monthly average in September.

Meanwhile, after recording two consecutive months of MoM growth that was below its historical average in June and July, MoM growth in CPI other personal services prices was materially above its historical monthly average for the second straight month in September.

Airfares remain flat in September despite surging jet fuel prices

Despite four consecutive months of higher jet fuel prices, which increased by 43.6% from the end of May to the end of September, airfares remained flat in September — a surprising trend.

While there’s still the potential for a material relative increase in airfares, including in October, which is historically a stronger month for airfares, jet fuel prices have recently softened. Should this softening continue, then the odds of a material relative increase in airfares will diminish.

Overall adjusted core services price growth moderates in September, but remains elevated

Looking at overall adjusted core services prices (I make an adjustment to exclude lagging shelter costs, indirectly measured health insurance prices, and the household operations component, which has not been measured consistently since 2022), MoM growth moderated in September to be 0.2% above its historical average versus 0.5% in August.

This saw YoY growth fall to 5.0%, from 5.5% in August. While growth has seen a material fall from peak levels, it thus remains elevated. Furthermore, assessing recent trends against last year’s prior comparables, suggests that a material further deceleration in annual growth during Q4 2023, is unlikely.

Monthly headline & core CPI growth largely in-line with historical averages

The headline CPI recorded MoM growth of 0.25%, which was only modestly above the historical average for September (0.17%). In relative terms, this marked the softest MoM growth that has been seen since May.

The core CPI recorded MoM growth of 0.23%, which was virtually in-line with the historical average for September (+0.03% divergence). This marked the fifth consecutive month of moderating growth in comparison to the historical average, and the softest relative growth seen since September 2021.

Annual CPI growth unchanged, but the core CPI declines for a sixth consecutive month

On an annual basis, headline CPI growth was unchanged at 3.7%.

Meanwhile, the core CPI saw its sixth consecutive month of moderating annual growth, falling to 4.1%, down from 4.3% in August.

Spot market rent adjusted measures remain at or below 1% YoY

Adjusting the CPI for Apartment List’s spot market rental data, shows that headline CPI growth came in at 1.0% YoY, unchanged from August and in-line with my forecast.

The core CPI adjusted for spot market rents came in at 0.7% in September, down from 0.9% in August. This was slightly below my estimate of 0.8%.

Note that as my attention now turns towards my medium-term US CPI update, I have not provided a flash estimate for October within this review, with future forecasts to be released alongside that report.

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