The Consumer Price Index (CPI) rose by 0.65% between August and September on a seasonally-adjusted basis, or 8.1% annualized. Consumer spending at retailers, bars, and restaurants jumped by 0.77%, or 9.7% annualized, in September, after rising 1.29% (16.6% annualized) in August. Even more striking, the prices of finished goods and services sold by U.S. businesses (PPI final demand) rose by 1.34% month-on-month, or 17.4% annualized, which was the fastest pace since March 2022. Those hoping for a benign series of inflation prints have been disappointed.
Much of this month’s pop was attributable to energy goods and associated items. Exclude energy, and CPI inflation came in around 4% annualized, just as in August. (And unlike in August, no one can blame the prices of wireless plans, which fell.) Exclude other categories that tend to be volatile, idiosyncratic, or have known measurement issues, and annualized CPI inflation was around 3-3.5% in September. The PPI for final demand for consumer goods and services excluding food, energy, and “distributive services” such as trucking and flights rose at a yearly rate of 4.5% in September. These rates of inflation are all far slower than the dire headline numbers, but they are also notably faster than what prevailed immediately before the pandemic. Moreover, these rates of inflation have been remarkably consistent over the past several years.
So while there was little new information, every additional set of prints like this continue to corroborate the thesis I have been pushing for several years: the pandemic and associated policy responses reset underlying inflation to be modestly faster than it was before, which means that there will be no “immaculate” disinflation from here back to the Federal Reserve’s alleged 2% yearly goal. According to the CME, the market-implied probability that the Fed will raise its short-term interest rate target by 0.5 percentage points from where it is now by the end of this year jumped from 13.3% on October 7 to 18.7% on October 13 to 28.5% as of the end of October 14, when the CPI numbers were published. (This probability has since dropped to just 5.6% in the face of concerns about the credit demands of some data center operators.)
Intriguingly, the relatively stable (or mildly accelerating) underlying trend of inflation has coincided with a recent modest slowdown in the typical worker’s wage growth. The big question going forward is whether that slowdown will continue—and eventually flow through to consumer spending and prices—or whether it will reverse given the recent re-acceleration in the job market. Another question worth pondering: given what we now know about how retailers managed their inventories over the past few years, are prices more or less sensitive to renewed supply disruptions?
The Inflation Picture is Not Good, But Not Terrible
It is understandable why some want to blame the current administration for the failure of U.S. inflation to return to the Fed’s 2% yearly goal. For one thing, it seems only fair: the 2024 election was won in part because of misplaced anger about inflation, and because enough voters believed ludicrous claims that a new set of people in charge would cause prices to fall. For another, it is obvious that some of this administration’s signature policies—most notably the tariffs and the war with Iran—have made prices higher than they likely otherwise would have been.1
But it is nevertheless misleading to claim, as some have, that U.S. inflation would have painlessly decelerated back to 2% on its own in the absence of policy disruptions from the executive branch.
The simple boring fact is that the underlying inflationary trend has been remarkably stable over the past few years. As I have been pointing out for some time, confirmed by the latest data, underlying services prices have been running persistently faster than in the pre-pandemic years, while goods prices were never falling fast enough to offset that even before the tariffs, the data center boom, and the war with Iran.
On the bright side, the data so far do not suggest that these underlying trends have been getting much worse, while some of the most acute price spikes—particularly “components for manufacturing” and “supplies to manufacturing industries”—may have peaked.