September Inflation Reports

October 12, 2023

The “data dependent” Federal Reserve received another two data points this week as two inflation reports for September were published. Let’s take a look at what each revealed – and what they may mean for the path forward.

Producer Price Index (“PPI”)

First up was PPI, which measures wholesale prices (cost producers pay for finished goods). PPI rose 0.5% in September, as compared to an estimate of 0.3% and prior month increase of 0.7% in August. On a year-over-year basis, PPI increased 2.2% (the highest YOY change since April 2023).

Markets did not react meaningfully to these results. There was some discussion that these metrics may indicate “stickier” inflation and that inflation may persist on the consumer end too (as PPI measures the cost of inputs that ultimately flow thru to prices consumers pay). However, the increases remain small and indicate that progress is certainly being made on the inflation front.

Consumer Price Index (“CPI”)

Prices consumers pay for a wide variety of goods (as measured by CPI) increased at a (very) slightly faster than expected pace in September. The index rose 0.4% on the month (compared to estimates of 0.3%) and 3.7% year over year (consistent with August’s year over year increase and slightly ahead of estimates of 3.6%).

Excluding volatile food and energy (known as Core CPI, the Fed’s preferred measure), a 0.3% increase was observed for the month and 4.1% year over year, both of which were exactly in line with expectations. The Fed tends to prefer this measure as it has historically been a better predictor of long term trends by removing two volatile elements that are not easily controlled by monetary policy (ie: food and energy).

What drove this month’s change? Consistent with prior months, shelter was a main contributor along with energy. Services prices also rose slightly (0.6%) and vehicle prices finally showed some relief albeit mixed with new vehicles up 0.3% and used down 2.5%.

These two inflation reports came one day after the Fed released minutes from its last meeting. Those comments showed that many Fed officials feared stubborn inflation and felt another rate increase may be necessary. However, commentary since that meeting has been more dovish – due in large part to the sharp rise in yields across the curve in recent weeks. Fed governor Christopher Waller commented this week “the financial markets are tightening up, and they’re going to do some of the work for us.”

What will these inflation reports mean for markets? Given their relatively benign nature, it’s unlikely they will sway decisions too far one way or the other. Yes, inflation remains above the Fed’s 2% long-run target but considerable progress has been made over the past year. In our view, inflation is trending the way they had hoped. Labor market strength and rising interest rates are more likely to get the Fed’s attention heading into the next rate decision.

Onward we go,

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