October CPI expected to show inflation still high even though prices for some goods have fallen

Consumer inflation may have eased slightly in October as goods prices fell, but prices for services and rents should continue to climb.

Economists expect October’s consumer price index to have risen 0.6% from September, or 7.9% from a year ago, from 0.4 % or 8.2% per year in September, according to Dow Jones. Excluding food and energy, core CPI is expected to have increased by 0.5%, or 6.5% on an annual basis. This is less than the gain of 0.6% in September, which was 6.6% on an annual basis.

The CPI, released at 8:30 a.m. Thursday, is a key report for the Federal Reserve, which meets in mid-December and is expected to raise its target federal funds rate by half a percentage point.

The central bank has signaled that it will scale back its interest rate hikes, but may take them higher and hold them there to fight inflation. For this reason, the report will be watched closely by investors, and it could affect financial markets if it turns hotter or colder than expected.

“We’re going from red to boiling, and that’s not cool enough for the Fed,” said Diane Swonk, chief economist at KPMG. Swonk said policymakers should feel comfortable enough with the report to raise rates by half a point, as he indicated. The Fed had increased in increments of 75 basis points. One basis point is equal to 0.01 percentage point.

Jefferies money market economist Tom Simons said investors appear to be expecting a fresher number than the consensus forecast.

“It seems the consensus is that the number is going to miss the consensus. Generally everyone expects it to be lower than those expected numbers,” he said. “There’s a lot of mixed movement between different price categories.”

Simons expects core CPI to have risen 0.4% and within that, prices for goods fell 0.2% while services rose 0.6%. Services include items such as medical care, rent, airfare, recreation, education, and car insurance.

The CPI report is widely expected to show that used car prices are down, but rents and housing have continued to rise.

“We should start to see some of the discounts on large housing-related items, like appliances,” Swonk said. She expects inflation for housing-related goods, such as furniture, to continue to decline and housing costs to fall later.

“It won’t be this month, but in early 2023 we could see more moderation in housing costs,” she said. Housing costs represent 40% of the core CPI.

Blerina Uruci, chief economist at T. Rowe Price in the United States, said the October report would still be hot, but there should be a deceleration in underlying inflation.

“Some of it comes from the prices of goods because there’s a slowdown in demand, as we’ve seen recently in consumer spending,” she said. High commodity prices ended up hurting demand. “It’s a small progress that an increase in inflation can eat itself up in some way.”

Uruci said the strength of the US dollar may also help reduce inflation on imported goods. “The recent strength of the US dollar should be a source of disinflation” in the coming months, she said. “It’s going to play out through the commodity channel.”

Bespoke Investment Group notes that economists have consistently underestimated inflation over the past year. The market mostly fell on CPI release days, the company said. But the S&P 500 staged a surprisingly strong 2.6% rally last month, even though the September CPI was warmer than expected.

This has only been true a minority of times recently. The S&P 500 is down a median of 0.44% over the past 12 days of CPI reporting, and over the eight days the CPI was higher than expected based on inflation from Basically and overall, the S&P fell a median of 1.23%.