Inflation continues to cool

November 14, 2023

The consumer price index (CPI) was unchanged in October, a sharp slowdown from the 0.4% in September. A sharp drop in energy prices offset a slight acceleration in food prices. Gasoline prices alone plummeted 5% during the month, the largest monthly drop since May. The CPI rose only 3.2% from a year ago, marking the first drop in the annual measure of the index since June. The low is still 3% in June, but a surge in inflation a year earlier helped temper those gains. Overall inflation peaked in June 2022.

Food prices went the other direction and accelerated in October. Food at home (from the grocery store) rose 0.3% during the month, up from 0.1% in September. Gains were concentrated in proteins - meats, poultry and fish. Pork prices jumped 1.3%, while beef prices hit a record high in October and surged 1.2% from September. Droughts thinned the cattle herds over the summer. Dairy prices also picked up. Prices of food at home rose only 2.1% compared to a year ago, below the pace of overall inflation. That is little consolation given the elevated level of prices and the hard trade-offs many at the grocery store are still forced to make.

Food away from home rose 0.4% and was up 5.4% from a year ago. That is the lowest annual increase for restaurants in two years. The sticker shock on the price of a steak is still stunning.

Core CPI (excluding food and energy) came in somewhat weaker in October than market participants expected. It rose 0.2%, after rising 0.3% the two previous months. Core increased 4% from a year ago, down from 4.1% last month and its slowest annual pace since September 2021.

A sharp moderation in the shelter costs and a drop in the price of new and used cars helped to cool core inflation. Shelter costs rose only 0.3% during the month, half the pace of September. The majority of the slowdown in shelter costs came from a sharp drop in hotel room rates. Rents remained elevated, despite a drop in annual lease prices; it takes time for those to show up in lease renewals. The owner’s equivalent rent component moderated slightly, but those improvements could stall as we move into 2024 given the pickup in home values we saw over the summer.

The core services measure of the CPI, which strips out shelter costs, rose only 0.3% in October after spiking 0.6% in September. Service sector inflation rose 3% from a year ago in October, which is up slightly from the 2.8% pace of October. However, the trend in core services remains in the right direction, which is down.

Note: The Bureau of Labor Statistics began to introduce a change in how it measures medical insurance with the October 2023 release. The improved methodology will be phased into the data over the next six months. The adjustment means that medical insurance rose 1.1% during the month after falling at more than three times that pace in the previous two months. Medical insurance is still reported as falling 34% from a year ago, which is not what consumers are experiencing.