Up 0.4% for the Month

•                 Topline gauge of consumer prices saw inflation accelerate modestly in October 2022, rising 0.4% for the month

•                 The pace of gains in the Core Consumer Price Index (CPI), less Food & Energy, decelerated to 0.3% in October 2022 versus the prior month

•                 Transportation costs bounced in October 2022, up 0.7% for the month

•                 Housing & Food prices continued to post strong growth in October 2022, joined by a resurgence in prices for consumer Recreation spending

The Consumer Price Index (CPI) for October 2022 was up by 0.4% in seasonally adjusted terms, only marginally above the pace seen in September (0.44% vs. 0.39%). This translates to a 7.8% year-over-year gain in topline prices. More importantly when evaluating current conditions, rather than the damage that price gains have done in the past year on aggregate, the October monthly rise equals a 5.4% annualized pace, representing consumer price inflation conditions if October’s pace were to be maintained for a one-year period. Consumer price growth reaccelerated in October after moderating in the few months prior. The risk of inflation reigniting as consumer dive into holiday spending will keep the Federal Reserve firmly on their aggressive monetary policy tightening path.

Core CPI – which excludes volatile Food and Energy prices – saw its monthly growth rate halved in October 2022, coming in at a 0.3% gain for the month versus 0.6% in both August and September. The Core CPI metric more closely aligns with the Federal Reserve’s inflation target (the Core Personal Consumption Expenditures (PCE) Deflator). Though growth in Core CPI decelerated in October, its annualized pace remains above the Fed’s 2.5% target average at 3.3% for the month. Core CPI inflation will have to demonstrate a consistent trend of deceleration before the Fed can be expected to consider that they are en route to their goal of stable inflationary pressures. With the holiday shopping season set to boost consumer spending yet again – regardless of broadly weakening economic conditions – the Fed will continue to face an uphill battle.

The Housing component of the CPI index gained 0.5% in October 2022. This result is down somewhat from the August and September gains (0.7% and 0.5%, respectively), but still equals a 6.6% annualized pace. Housing accounts for more than 40% of the total CPI’s weight and continues to post some of the fastest price growth among the overall index’s components. Along with Food & Beverages, Housing represents an unavoidable area of spending for households, and these components’ strong gains are reinforcing why the Federal Reserve feels it necessary to continue to raise rates aggressively in order to quell inflation’s impact.

Energy price growth bounced back in October 2022, gaining 1.8% for the month after three (3) consecutive months of declines. Gasoline prices were up 4.0% in October. Talk of China’s economy transitioning from its “Zero COVID” strategy suggests that renewed upward pressure on oil prices is a possibility entering 2023. And if oil prices are pushed higher, consumer prices will surely follow. Such an external shock would not directly impact the Core CPI measure, but oil prices flow through to virtually all consumption categories in one way or another, be it transportation of goods to store shelves and restaurant tables, or even the plastics used in the production of goods. Inflationary pressures could extend into mid-2023 if the October 2022 bump in energy costs represents the start of a new upward trend.

The Federal Reserve’s monetary policy tightening plans remain aggressive. Their data dependency message will require Core CPI inflation, especially, to ease before any course correction becomes a consideration. PNC is now forecasting a three-quarter recession in 2023 as its baseline outcome given that inflation and higher interest rates have and will continue to undercut U.S. consumer sentiment and spending capacity. To some extent, this is indeed the Fed’s goal, since only a cessation in consumer demand can truly stabilize price pressures across the economy. But it must be noted that the potential for continued inflation at recent levels would be significantly more harmful than the mild recession PNC expects in 2023Q2-2023Q4