More good (inflation) news for the Fed
CPI inflation for October came in a touch weaker than consensus, though in line with our forecast at 0.0% m/m, while the core CPI also surprised to the downside at 0.2% (consensus/ABN: 0.3%). In annual terms, disinflation therefore continued, with headline inflation falling back to 3.2% y/y from 3.7% and core inflation down one tenth to 4.0%.
US disinflation continues
As expected, the fall in gasoline prices (driven partly by lower refining margins) was the main driver of the flat m/m inflation reading. However, core inflation was also unexpectedly benign. While we had expected a decline in shelter inflation, we thought there would be more upward pressure from the annual update to the medical services inflation methodology. Medical services had been a drag on inflation for the past 12 months due to a quirk in the way this component is calculated – based on the retained earnings of health insurers, which is updated only once per year. While medical inflation did indeed pickup, the rebound in this category was not as large as we feared. Elsewhere, there was more good news in the unexpected decline in new car prices, which kept core goods inflation at a roughly flat reading y/y.
Risk diminishes further that disinflation could abruptly end
All in all, this is a very positive report for the Fed, with now five consecutive months of relatively benign inflation readings. This has pushed 3m/3m annualised core inflation down to within touching distance of the Fed's 2% target (see chart below). Looking ahead, in the near term headline inflation is likely to see continued downward pressure in November from the further falls in gasoline prices. For core inflation, while there is some risk that medical services inflation could yet put renewed upward pressure on the CPI, this will not be enough to derail the broad disinflation trend. Pipeline pressures elsewhere (such as incoming housing rental data for new leases, and wage growth) suggest a further gradual cooling in services inflation is in the offing. Meanwhile, the PCE inflation measure (which the Fed has as its official goal) will not be affected by the medical services methodology update, as the PCE measure is calculated in a different (and less volatile) manner.
With each passing month of benign inflation data, the risk that Chair Powell and other FOMC members have flagged of an abrupt end to the disinflation trend becomes smaller. Combined with the continued cooling in the labour market suggested by the , this further strengthens our conviction that the Fed is done raising rates, and it raises the risk that the Fed could yet pivot to rate cuts earlier than our .