Inflation hotter than expected in September

October 12, 2023

The Consumer Price Index (CPI) rose 0.4% in September, after advancing 0.6% in August, slightly above market expectations. Prices at the gas pump increased 2.3% during the month, after surging 10.5% in August. Prices at the pump have since receded and are hoped to be more of a neutral for inflation in October.

Food prices at the grocery stores were nearly unchanged with an increase of 0.1%. That gain masked a jump in the costs of proteins - meat, poultry, pork and eggs - which was offset with a sharp drop in the costs of cereals and baked goods. That makes for some hard tradeoffs at the grocery store for low- and middle-income households. The overall index was up 3.7% for the month, the same as August, and is off the low for the year, which was 3% in June. The CPI peaked in June 2022, which helped to cool year-over-year measures in June 2023.

The cost of going out to eat accelerated 0.4% during the month, after cooling a bit in July and August. Employment at restaurants crossed a February 2020 peak in September on the heels of a surge in new business formation. People have shifted where they are spending their discretionary dollars from major urban centers to the suburbs.

The core CPI, which strips out the volatile food and energy components, rose 0.3% in September, the same as August. Shelter costs accelerated in September, with all components picking up, including the costs of insurance. This is something the Federal Reserve has openly worried about. The recent rebound in home values, despite high mortgage rates, has shifted the focus on cooling inflation to other sectors of the economy. Note: Rents had been falling in the high frequency data, but we are seeing a return of young adults (18-24-year-olds) to urban areas, which along with high housing costs, is buoying the demand for apartment and home rentals. The core CPI cooled to a 4.1% pace from a year ago, its slowest pace since the fall of 2021 when inflation was still accelerating.

The core services component of the CPI, which strips out rents of apartments and homes, jumped 0.6% during the month, an acceleration over the 0.4% pace of August. Gains in airfares, hotel room rates and insurance costs all picked up. Those out and on vacation reached the highest level for the month of September since 2016 last month, which suggests that travel remained unusually strong at the start of the school year. Baby boomers are spending more than previous generations as they enter retirement. The three-month annualized pace jumped to 4.8% during the month, more than double the pace of August. The six-month annualized pace was up 3.1%, 0.5% ahead of the pace of August. The year-on-year measure of the super core, as it is known, showed signs of cooling in August.

The persistence of core services inflation is particularly worrisome to the Federal Reserve, as it accounts for more than half of inflation for the overall economy. It is also being distorted by a mismeasurement in the health insurance figures, which shows medical insurance costs down nearly 40% from a year ago. That will be rectified with revisions to the calculation of CPI in October and become a driver instead of a drag on overall inflation measures. The Fed is aware of the change.