Today’s inflation reading was disappointing again. Despite a slight cooldown in the topline figure, core inflation—the less volatile component of inflation and better predictor of prices in near future—increased 6.6% over the year, and 0.6% in September. Given that core inflation is what the FED hopes to influence, an acceleration will likely encourage the FED to stay the course and keep increasing interest rates until they see the trend reverting.
On a positive note, given that global supply chain issues are resolving, we are likely to see some relief in the coming months. Supply chain disruptions have been a major contributor to inflationary pressures, and are strongly correlated with overall inflation.
Here are some takeaways from today’s report:
- Goods prices are still high and likely to stay at elevated levels for the next couple of months. Core goods prices increased by 6.6% over the year.. As the holidays approach, retail sales are likely to climb again, putting pressure on goods prices. Consumer spending could also receive a boost due to student loan debt forgiveness.
- A decline in gas prices, once again, prevented the topline number from increasing further. Gas prices fell by 4.9% in September—significantly more slowly than the prior month’s 10.6% decline. However, gas prices have recently increased and OPEC’s decision to cut production could put pressure on topline inflation in the coming months.
- The labor market is holding steady for now, but high inflation and rising interest rates are influencing both business and worker behavior. As a result of a rapid increase in the cost of borrowing, employers are reducing future headcount growth goals, causing job openings to fall. And as the costs of essentials rise, consumers may have less discretionary income to spend on big-ticket items and luxuries. As rents climb, workers continue to look for job opportunities that would allow them to relocate to more affordable neighborhoods. According to the ZipRecruiter Job Seeker Confidence Survey, 48% of job seekers are open to relocating for a job opportunity, with 38% prepared to move out of state.
- Real earnings declined after briefly increasing for two months. Real earnings declined by 0.1% over the month following a strong monthly price increase of 0.3% in September. Although employers are rapidly raising nominal wages to recruit and retain talent, wage gains are being eroded by high inflation. The recent decline in real wages has prompted consumers to increase their credit card spending to maintain their living standards. But credit card debt can only rise for so long before the costs of servicing that debt eat into future consumer spending. After the holiday spending spree is over, we can expect to see consumer spending cool down somewhat, reducing pressure on inflation.