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September US CPI Summary: Core Inflation Trends and Outlook

Core Inflation Overview

The September US Core CPI inflation data showed a month-on-month increase of 0.13%, slightly below expectations. However, the 3-month annualized change reached 2%, indicating a potential firming inflation trend after a series of weak readings earlier in the year. This suggests that while the immediate data may not be strong enough to reassure all Federal Reserve officials, the underlying inflationary pressures are beginning to show signs of stabilization.

Key Points

• Core services inflation was in line with expectations, rising 0.21% month-on-month.
• Core goods inflation disappointed, declining 0.2% m/m and reaching a -1% y/y rate, the lowest since August 2004.
• Medical care commodities experienced the largest drop on record, contributing to the weakness in core goods inflation.
• The core goods inflation trend continues to underperform both macroeconomic models and micro data indicators like producer prices and private gauges.

Core Services Inflation

Core services inflation remained stable, with a 0.21% m/m increase. However, shelter inflation saw a slight slowdown due to softer rent and owner's equivalent rent data. This was expected, given the unusually strong August reading.

Key Insights

• Shelter inflation is expected to decelerate modestly in the coming months, though the rent price trend remains supported by macro models.
• Lodging away prices were higher than anticipated, but the year-over-year rate did not spike.
• Transportation and medical care services inflation was mostly in line with expectations, with medical care services showing a return to more normal levels after recent volatility.

Core Goods Inflation

Core goods inflation declined 0.2% m/m, reducing the year-over-year rate to -1%, the weakest since 2004. This decline was more widespread than just the medical care sector.

Key Observations

• Medical care commodities fell 0.83% m/m, the largest drop on record, impacting core CPI.
• Used car prices continued to lag behind alternative private estimates, though there is a modest uptick in used car inflation.
• Apparel inflation appears to be on an upward trend, with PPI data suggesting a meaningful acceleration in the coming months.
• The overall core goods inflation forecast is conservative, but positive macro signals and micro indicators support the expectation that core goods inflation will rise over the year ahead.

Inflation Outlook

Near-Term Expectations

• Core CPI inflation is expected to remain near current levels through 2017, with a risk of rounding down to 1.6%.
• Month-over-month core CPI inflation is forecast to be slightly above 0.16% through year-end.
• These forecasts support a potential rate hike in December, assuming other factors align with expectations.

Medium-Term View

• The medium-term view that core inflation should normalize remains intact.
• Positive base effects, macro momentum, dollar weakness, and a tightening labor market are expected to support a pickup in year-over-year core inflation in 2018.

Energy and Food Inflation

• Energy prices were the main driver of higher headline CPI in September, due to hurricane-related refinery outages.
• Food inflation rose to 1.2% y/y, the highest since late 2015, with producer prices suggesting further upside in consumer food inflation.

Market Implications

• Headline CPI forecasts are above market pricing, though the gap is narrower than historically.
• Market participants should remain cautious as core goods inflation has underperformed expectations, potentially lowering the odds of a December rate hike.

Analysts and Disclosures

• Matthew Luzzetti, Markus Heider, and Laura Desplans are the lead analysts.
• The research is independent and not subject to conflicts of interest.
• Disclosures are provided for legal and regulatory compliance, including currency risks, FX volatility, and investment risks.

Additional Notes

• Deutsche Bank provides research and market analysis, which may not be suitable for all investors.
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