Inflation has been front and center in the minds of investors over the last two years. It is the beast which, once loose from its cage, attacks and consumes purchasing power and investment returns. It has economic and political consequences and is one of the few things that touches lives across all demographics and regions. Today, we received a status update on this economic tiger (no offense to tigers intended) in the form of Consumer Price Inflation (“CPI”).
During the month of October, inflation was broadly lower and both the overall and core (CPI less food and energy) measures were below expectations.
Source: Bloomberg/BCIS
As the chart below evidences, goods inflation has all but disappeared, reverting towards its historical norm. Services inflation, on the other hand, has not.
Source: Bloomberg
Services can be further broken down, and when this is done, we see the following:
Source: Bloomberg
When looking at the chart above, it is apparent that housing is now the fangs of the inflation tiger. This is also evidenced when CPI inflation is viewed at the “supercore” level, or core CPI less housing, where inflation, while still above the Federal Reserve’s target of two percent, has cooled considerably, as further evidenced by the following chart:
Source: Bloomberg
Real wages increased marginally during the month, which helps consumers but is not as favorable when viewed as potentially inflationary:
Source: Bloomberg
The BUZZ Bottom Line – The below expectations CPI statistics for the month of October should give the Fed comfort that its actions have been having the desired effect and remove a rate hike from play, barring unforeseen shocks, in the December meeting. We will now be looking for any changes to the “higher for longer” aspect of policy and any change to the timing of the Fed “pivot” to loosening monetary policy. We believe it is too early to transition to a “lower, sooner” mindset and are, therefore, maintaining our view of underweight equity risk for the near-term and overweight fixed-income risk.
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