Consumer prices rose more than expected in October, while the core index came in cooler than anticipated, in what looks to be a mixed report at first blush.
Core CPI rose 0.157% MoM in October, against expectations for a 0.2% rise. The core index trailed estimates in September as well. The annual gain ticked lower to 2.3%. That too was below consensus. The cool read on core will be a welcome development for those hanging their hats on the Fed maintaining plenty of plausible deniability when it comes to keeping the bar for the resumption of rate hikes much higher than the bar for more cuts which, by all accounts, is pretty low.
The broader gauge, however, rose 0.4% MoM in October, a brisker pace than the 0.3% consensus was looking for. The YoY gain on the headline index was 1.8%, also hotter than expectations.
Wednesday’s CPI data is set to be scrutinized more closely than usual, and not just because yields are on rise (last week, 10-year yields jumped more than 20bps in the US). At the post-FOMC press conference last month, Jerome Powell made it abundantly clear that it would take a rather dramatic spike in inflation to put rate hikes back on the table.
“We would need to see a really significant move up in inflation that’s persistent before we would consider raising rates to address inflation concerns’, Powell remarked.
That appeared to suggest that policymakers are more than happy to tolerate an overshoot.
“Powell attempted to walk back any perceived market ‘hawkishness’ as he effectively signaled a completely ‘asymmetric’ policy going forward, one where it would take ‘significant, persistent’ rise in US inflation before they would ever again be able to consider a rate hike, versus what we already know is a ‘low bar’ to cut”, Nomura’s Charlie McElligott wrote late last month, underscoring the point.
Subdued inflation plays into that narrative and makes it easier for the Fed to justify accommodation despite a generally strong economy. Donald Trump habitually refers to low inflation while excoriating the Powell Fed for not cutting rates faster and deeper.
The Fed is reviewing its policy framework and there’s a vociferous debate (to the extent wonks have “vociferous” discussions) about the proper course going forward as central banks confront persistent undershoots of their price targets despite historically low rates and, in many locales, extreme monetary policy.
Powell will address lawmakers on Wednesday, and a broadly neutral CPI report means he has a blank canvas to paint on. That could be good or bad.