- Both overall (0.4%) and core (0.3%) CPI inflation came in slightly higher in September than expected.
- On a year-over-year basis, both overall (3.7%) and core (4.1%) inflation continue to slow from their peaks in 2022.
- Energy and shelter prices were the main contributors to inflation in September. Goods prices outside of food and energy are falling.
- The FOMC is likely to keep the Fed funds rate unchanged when it meets in a few weeks.
- PNC expects inflation to slow further into 2024.
The core index, excluding volatile food and energy prices, rose 0.3% in September, above the consensus for a 0.2% increase. Core inflation was 0.3% in August, and 0.2% in June and July, and thus the September number is close to the recent trend. Core inflation was 0.4% or higher from December 2022 to May 2023, so monthly core inflation has slowed in the second half of this year.
Core services inflation accelerated from 0.4% in August to 0.6% in September, with shelter inflation accelerating from 0.3% in August to 0.6% in September. But core commodities prices fell 0.4% in September after a 0.1% decline in August. There were big declines in prices for used cars and apparel in September.
On a year-over-year basis, before seasonal adjustment, overall inflation was 3.7% in September, the same pace as in August. This is up from 3.0% in June as energy prices have moved higher over the summer. But overall inflation has slowed dramatically since peaking at above 9% in mid-2022.
Year-over-year core inflation (before seasonal adjustment) was 4.1% in September, down from 4.2% in August and above 5% as recently as May. Core inflation peaked at 6.6% in September 2022 and has also fallen dramatically.
Inflation came in slightly above expectations in September but continues to move in the right direction. Price increases, both overall and core, have slowed over the past year or so as the big shifts in demand following the pandemic have settled down, supply chains have normalized, and wage growth has slowed. But inflation is still too hot for the Federal Reserve. The central bank has set an inflation objective of 2% using a different measure, the personal consumption expenditures price index, which tends to run a bit more slowly than the CPI. The overall and core PCE price indices also show inflation that is slowing but remains well above 2%. Given this, the Fed will maintain its restrictive monetary policy to slow demand and cool off inflation.
This morning’s CPI report does not change the near-term outlook for monetary policy. PNC expects the Federal Open Market Committee to keep the Fed funds rate, its key short-term policy rate, in a range between 5.25% and 5.50% when it next meets on Nov. 1. At this level the fed funds rate is contractionary, weighing on economic growth. PNC expects the FOMC to keep the fed funds rate in its current range until mid-2024. The fed fund futures market is pricing in an 89% probability that the FOMC keeps the fed funds rate unchanged at its next meeting, essentially the same probability as yesterday, and up from 80% a week ago.
PNC expects inflation to continue to slow through the rest of 2023 and into 2024. Weaker economic growth, a softer labor market, and slower rent growth will all contribute to lower inflation. An expected mild and short recession starting in the second quarter of 2024 will further slow inflation next year as overall economic demand contracts.
With this morning’s release, Social Security recipients will receive a 3.2% increase in their benefits starting in January. Benefits rose 8.7% in 2023 and 5.9% in 2022 with higher inflation.
