Disinflation continues in October

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What happened?

Inflation during the month of October came in slightly lower than expectations, with month-over-month core inflation running at a pace of 0.2% (~2.4% annualized) and the year-over-year figure coming in at 4.0%. That gap between the annualized month-over-month number and the year-over-year rate reflects the significant disinflation seen over the past year as a result of the Fed’s tightening of monetary policy.

There will be another employment report and CPI print before the Fed’s December 13 meeting. However, it would take a series of higher prints reflecting a true reacceleration in inflation to convince the Fed to hike again. Today’s print of steady softening should increase the market’s confidence that the Fed has finished raising rates this cycle.

Under the surface

Goods inflation is low, as is most services inflation. The entrenched piece of inflation is in shelter, which accounts for the remaining stickiness of services inflation. Housing alone contributed almost two full percentage points to overall inflation. That inflation is still moving lower but remains elevated. It will take a quashing of this inflation to bring total inflation back to target.

The challenge there is that with many people feeling more locked into their current houses than normal, given a wide gap between the typical mortgage rate they currently have versus the rate they’d be able to get buying a new house today, the supply of houses on the market remains tight. That has driven the Case-Shiller Housing Index back to a new all-time high—given the 15-month lag, which has contributed to moderating inflation over the past year in the wake of price declines in 2022, that gives reason to believe shelter inflation may remain entrenched for some time from here.

When can one talk about rate cuts?

How does this data comport with the market baking in a full percentage point of cuts by the end of 2024? At 4.0% YoY and with shorter-term annualizations still not falling back to the Fed’s 2.0% target, there still remains a way to go to bring inflation fully to heel. The policy response from here appears to be a sustained period of elevated policy rates. For the time being, the Fed’s leaning will still be toward hiking, if necessary, and inflation will need to inch closer to 2% than it currently is before rate cuts begin to enter the conversation. Such movement is not expected to happen until the second half of 2024.

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