Headline inflation was unchanged at 1.7% for the third consecutive month in October. Prices were flat for the month and haven’t moved meaningfully since July, after surging in the late spring and early summer. Core inflation, which eliminates the impact of volatile food and energy prices, increased by 0.2%, pushing the year-over-year change in core CPI marginally higher to 1.8% The month-on-month change for both headline and core CPI were slightly greater than expected for the month; surveys had suggested a 0.1% decline for the headline index, and an increase of just 0.1% for the core reading.
Though prices surged in the first half of the year, disinflationary pressures have re-emerged on the back of sharp decline in commodity prices, most notably oil. A combination of ample supply and slower growth in global demand has pushed energy costs lower in recent months. That reduction in cost has been a boon to U.S. households, providing a bit more flexibility in budgets and capacity for discretionary spending. Whether or not that translates to a stronger sales results for retailers in the rapidly approaching holiday shopping season remains to be seen.
We are now over five years into the current expansion. Labor market conditions continue to improve on the back of solid job creation. While conditions are not yet tight enough nationally to act as a catalyst for a meaningful pickup in wage growth, some pockets have emerged in certain regions and sectors. Numerous indicators seem to point to the potential for wage growth to accelerate in the coming quarters.
If U.S. growth continues to outpace that of other developed countries, sustained strength in the Dollar may also act as a headwind to domestic inflation by maintaining downward pressure on commodities and reducing the price of foreign goods compared to their domestic counterparts.
Core inflation remains persistently low, and recent FOMC minutes suggest that the committee expects inflation to remain below 2% over the next few years. Moreover, the minutes suggest that the primary risks for GDP growth and inflation were still skewed to the downside – which would seemingly support the “lower for longer” policy stance on interest rates. Nonetheless, policymakers may still feel compelled to test the waters by raising rates next year, at the same time creating a bit of breathing room should the need to provide some further stimulus arise.