Summary: US CPI up 0.4% in September, slightly above expectations; “core” rate up 0.3%; NAB: other core measures surprisingly strong; Treasury yields rise materially; rate-cut expectations soften; non-energy services main driver, adds 0.35ppts; New York Fed Underlying Inflation Gauge slows from 3.0% to 2.9%.
The annual rate of US inflation as measured by changes in the consumer price index (CPI) halved from nearly 3% in the period from July 2018 to February 2019. It then fluctuated in a range from 1.5% to 2.0% through 2019 before rising above 2.0% in the final months of that year. Substantially lower rates were reported from March 2020 to May 2020 and they remained below 2% until March 2021. Rates have since risen significantly, although they have been declining since mid-2022.
The latest US CPI figures released by the Bureau of Labor Statistics indicated seasonally-adjusted consumer prices increased by 0.4% on average in September. The result was slightly above expectations of a 0.3% rise but less than August’s 0.6% increase. On a 12-month basis, the inflation rate remained steady at 3.7%.
“Headline” inflation is known to be volatile and so references are often made to “core” inflation for analytical purposes. The core prices index, the index which excludes the more variable food and energy components, also increased by 0.3% on a seasonally-adjusted basis over the month, in line with expectations. The annual growth rate slowed from 4.4% to 4.1%.
“US headline CPI printed at 0.4%, only a little to upside of consensus…but it was sufficient to initiate a sharp selloff in bonds,” said NAB senior interest rate strategist Ken Crompton. “Although the core ex-food and energy measure met forecasts at 0.3%, some of the other core measures were surprisingly strong and helped drive the market reaction.”
US Treasury bond yields rose materially on the day. By the close of business, the 2-year Treasury yield had added 8bps to 5.07%, the 10-year yield had gained 14bps to 4.80% while the 30-year yield finished 17bps higher at 4.86%.
In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months softened. At the close of business, contracts implied the effective federal funds rate would average 5.355% in November, 3bps more than the current spot rate, 5.40% in December and 5.425% in January. September 2024 contracts implied 4.98%, 35bps less than the current rate.
The largest influence on headline results is often the change in fuel prices. Prices of “Energy commodities”, the segment which contains vehicle fuels, increased by 2.3% and contributed 0.09 percentage points to the total. However, prices of non-energy services, the segment which includes actual and implied rents, had the largest effect on the total, adding 0.35 percentage points after increasing by 0.6% on average.
The Federal Reserve Bank of New York publishes an unofficial estimate of underlying inflation, known as the Underlying Inflation Gauge (UIG) and it was updated shortly after these latest CPI figures. While the Federal Reserve states the UIG does not represent an official estimate, the UIG does appear to lead the core CPI measure. September’s UIG registered an annual rate of 2.9%, down from August’s figure of 3.0%.
