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Core consumer price inflation in the US dropped marginally, on a year-over-year basis, in the month of October, as reported this morning by the US Labor Department this morning. Conversely, the more volatile headline CPI number rose by the same slight margin, lifted by higher energy prices in the same month. Overall, the Consumer Price Index for October was broadly in-line with the two assessments held by many market analysts: 1.) the environment and inputs for inflation (a tight labor market, increased prices due to trade war tariffs) remains generally unchanged in recent months, and 2.) the accommodation of the FOMC’s recent “mid-cycle adjustment” into lower short-term rates will take some time to show its effects on the US economy.

Key Takeaways

• The US Consumer Price Index (CPI) rose 1.8% in the 12 months through October, a pace +0.1% higher than both the prior month’s data, and the consensus of expectations for this month.
• The “core” reading of CPI fell to 2.3% over the same 12-month time period, against expectations for a 2.4% print matching September’s data.
•  The core reading is often the more closely analyzed component, as it is a less volatile number due to the exclusion of energy and food prices which can vary greatly over a given year with little correlation to overall price fluctuation.
• On a month-to-month basis, headline CPI rose +0.4% (vs. +0.3% exp.) while core CPI rose +0.2% as was expected by the consensus.

Market Reaction

As you can see from the hard numbers, a mostly unchanged economic environment in the US over the last month has yielded a mostly unchanged picture of consumer inflation. Because of the -0.1% dislocation between the consensus expectation and this morning’s data set, there is plenty of space for headline writers to focus on “slowing inflation.”

A key measure of U.S. consumer prices unexpectedly cooled in October https://t.co/lR9ENIZG7a

— Bloomberg Economics (@economics) November 13, 2019

But with that said, the slight decline in core CPI shouldn’t be nearly big enough to materially change the Fed’s or the markets’ view of inflation in the US: the headline number is running just below the Fed’s symmetrical target of 2% while core CPI runs just above it, and so there is still plenty of leeway to be patient and watch for the effects of the FOMC’s recent rate cuts.

The truth of this seems to have been proven out by the mild market reaction to this morning’s data. Gold spot prices traded briefly higher—by less than $1/oz—while Treasury yields continued a mild slide lower and the Dollar Index remain broadly unchanged. Equity futures were pointed lower at the time, but major US stock markets have trended higher in the time since.

Other Inflation Data

While CPI typically commands the attention of the public and the markets at large, the US Department of Commerce’s Personal Consumption Expenditures Price Index (PCE) is what the Fed uses to mark inflation officially. Our last read on that data came two weeks ago, covering the 12 months through September. PCE inflation in that period increased +1.3% YoY, while core PCE ran at +1.7% YoY; both reads were a slight decline from the month prior. At the release of October’s PCE read, on November 27, analysts will be looking to see if the stability in this morning’s CPI data is also reflected in the Fed’s preferred inflation metric.

Tomorrow will see the release of the Producer Price Index (PPI) more focused on the cost of input-goods for manufacturing and other industrial uses. It’s a number that the markets—especially the gold and Dollar markets—are generally much less sensitive to, and given the uneventful nature of this morning’s data I expect there to be little-to-no impact on price charts as long as the print is within touching distance of expectations (+0.3% MoM for the headline number; +0.2% for core PPI.)