Prices increased 7.7% over the year—the smallest 12-month increase since January. Core inflation slowed from 6.6% to 6.3% over the year, but remains concerningly high. (Core inflation is the less volatile part of inflation, which is more responsive to monetary policy.) Today’s reading, while an improvement, was not low enough to deter the Fed from another jumbo interest rate hike at the end of December. So far, the labor market has been resilient enough to tolerate the supersized rate hikes well.
On the job market side, we are seeing clear signs of a slowdown in wage growth, as well as employment gains in interest rate-sensitive industries, two signs that the FED will no doubt be happy to see. However, the pace at which employment gains are slowing is far more gradual than many expected, and suggests that despite aggressive rate hikes, a soft landing is still a plausible outcome for the U.S. economy.
Here are some highlights of today’s report:
- Growth in core commodities prices slowed down significantly. The core commodities price index increased 5.1% over the year, noticeably more slowly than the prior month (6.6%) and the smallest increase since May 2021. There is a glimpse of hope now that the recent runup in core inflation might now be reversing.
- Inflation in services remained high as consumer demand for services held strong. Service prices increased 7.2% in October—down from 7.4% last month, but still worryingly high. The main reason service prices are not yet slowing more meaningfully, despite slowing wage growth, is the strength of consumer demand. Consumer spending is still growing faster than it did before the pandemic on a monthly basis, and businesses report that consumers are tolerating price increases well. So businesses don’t yet have an incentive to cut prices. A decrease in real wages, combined with a decrease in household savings, will likely weaken consumer spending after the holiday shopping spree. That would finally reverse the upward trend in service prices.
- At 7% increase over the year, rent inflation is at a new record high. High mortgage rates are discouraging people from buying new houses and channeling them into the rental market. The shelter index increased 7% over the year—the highest 12-month increase on record. Rents are about 7% of the total consumer basket. Even though house prices have 3 times more impact than the rent in the CPI, it takes longer for house prices to respond to high mortgage rates than for rental prices to, so we are likely to see shelter costs keep overall price levels elevated for longer than desired. However, high-frequency private sector data shows that the official numbers from the BLS might be lagging in reflecting the lower cost of rentals in recent months. This is encouraging since increasing shelter prices are responsible for about 50% of inflation right now, even after recent interest rate hikes.
- Real earnings decreased again, signaling that we are likely to see the consumer demand get weaker in the near future. Real earnings decreased by 0.1% over the month. The decline in real wages is a concern for employees but good news for the FED since it signals that weaker consumer spending is ahead of us. After the holiday spree is over, we should see the consumer demand cool off as the purchasing power of paychecks keeps decreasing.
- High inflation and interest rates are affecting job market behavior. Job seekers are feeling less confident in the job market and less secure in their finances as the high cost of living hits them. 18% of job seekers said they are facing serious financial difficulties in October, up from 16% in September, according to the ZipRecruiter Job Seeker Confidence Survey. Deteriorating financial conditions are affecting businesses’ hiring plans as well. As rising interest rates raise the cost of borrowing, businesses appear to be putting less effort into proactively recruiting candidates. The share of job seekers who said that an employer reached out to them fell to 29% in October, down from 35% in May.