September’s Consumer Price Index and Producer Price Index numbers were released this past week. These are two of the big ticket inflation metrics that the Fed looks at when making rate-cut and other decisions. The numbers seem to indicate that although inflation has been decreasing, it is still somewhat sticky at current levels.
Starting with the CPI, the CPI gauges the change in costs for goods and services across the economy. In September, the CPI rose 0.2%, hotter than the expected 0.1%, bringing the year over year increase to 2.4%. The CPI is getting closer to the Fed’s target percentage of 2%, but it is having a hard time getting down there. Olu Sonola, head of Economic Research at Fitch Ratings, wrote, "The good news is that the trend remains broadly disinflationary, but the bad news is that services inflation is still a problem…Inflation is dying, but not dead.” However, the 2.4% year over year inflation rate is the lowest since early 2021. The improvements in inflation data in recent months is likely being caused by gas prices decreasing more heavily than food prices are rising. In September however, this wasn’t the case. Jeff Cox of CNBC wrote, “Much of the inflation increase — more than three-quarters of the move higher — came from a 0.4% jump in food prices and a 0.2% gain in shelter costs, the Bureau of Labor Statistics said in the release. That offset a 1.9% fall in energy prices. Other items contributing to the gain included a 0.3% increase in used vehicle costs and a 0.2% rise in new vehicles. Medical care services were up 0.7% and apparel prices surged 1.1%.”
Core CPI, CPI excluding food and energy prices, rose 0.3% in September, bringing the year-over-year increase to 3.3%. The median forecast for Core CPI was 0.2%. The Fed tends to view Core CPI as a more accurate inflation metric as food and gas prices tend to be far more volatile on a monthly basis than the rest of the goods and services. Even though headline CPI has come down to 2.4% year over year, Core CPI is remaining rather sticky over 3%. And that's not even taking food prices into account, which have risen 0.4% in 2024. September was the first time in roughly 18 months that Core CPI has accelerated.
Moving on to the PPI now. The PPI or Producer Price Index is the inverse of the Consumer Price Index. Instead of gauging the change in prices that consumers are paying, it gauges the change in prices that producers get for their goods and services outputs. In September, the PPI remained flat, which is interesting as the CPI rose a decent amount in September. The year over year PPI rate remained at 1.8%. Economists were expecting an increase of 0.1% for the month. Jeff Cox of CNBC wrote, “Within the PPI, a 0.2% decline in final demand goods prices offset a 0.2% increase in services. Excluding trade services from core PPI, the index increased 0.1%. A 3% jump in deposit services costs pushed the services index higher, while professional and commercial equipment wholesaling prices tumbled 6.3%. On the goods side, a 2.7% slide in final demand in energy was the main factor in the decrease. Similarly, the index for gasoline fell 5.6%, holding back gains on the goods index. Diesel fuel prices plunged 17.6%.” Core PPI, PPI excluding food and energy, was at analyst expectations with a 0.2% increase in September.
Interpreting both CPI and PPI data together, Jeff Cox of CNBC wrote, “Together, the releases indicate that inflation is off its blistering pace that peaked more than two years ago but still mostly holds above the Federal Reserve’s 2% target. While neither is the Fed’s primary inflation gauge, they both feed into the personal consumption expenditures price index that policymakers prefer. Following the releases, multiple economists said they expect the PCE deflator to show an increase of about 0.2% or slightly more for the month when it is released near the end of October.” PCE or Personal Consumption Expenditures, is the Fed’s preferred gauge of inflation. PCE takes both CPI and PPI into account and September’s PCE data is scheduled to be released on October 31st.
Overall, the data seems to indicate that we are slowly making our way towards the Fed’s goal of 2%, but it's not going to be a smooth ride. Sonu Varghese, global macro strategist at Carson Group, wrote, “The big picture is inflation continues to pull lower, albeit with some bumps along the way.” And Chicago Fed President Austan Goolsbee added, “The overall trend is what’s important, not the day to day fluctuations..The overall trend over 12, 18 months is clearly that inflation has come down a lot, and the job market has cooled to a level which is around where we think full employment is.” As Goolsbee said, the big picture trend is what we should be looking at, not each month in isolation. And the overall trend indicates that inflation is slowly coming down towards the Fed’s target.
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