The Consumer Price Index (CPI) rose 0.4% in October, while the core index without food and energy prices edged up 0.2%. Overall inflation rose 1.8%, which is still low relative to history. Core CPI rose 2.3% from a year ago. That is somewhat cooler than we saw over the summer.
Medical costs and a jump in energy prices were the primary contributors to inflation in October. Gasoline prices surged 3.7%. Medical care services are now up over 5% from a year ago, more than double the overall CPI.
Shelter costs rose last month, but at the slowest pace in six years. Food at restaurants and bars also increased but at a slower pace than we have seen in recent months. It is getting even cheaper to entertain at home than out this holiday season, which we expect to be the dominant trend. A pickup in home buying and the spending it triggers should overshadow other types of spending during the holiday season.
Apparel prices continued to plummet in October despite the introduction of tariffs on another $111 billion in Chinese imports on September 1. A drop in export prices from China and intense price competition across retailers will dampen the initial impact of those prices. Airfares and the price of new vehicles fell after rising earlier in the year.
Overall inflation remains tame but is not evenly distributed across households. Retirees, who are more dependent upon savings, spend more of their budgets on medical care and are feeling a pinch. This illustrates a more difficult challenge for the Federal Reserve, as older people tend to allocate a larger percentage of their budgets to medical costs than other categories. In fact, some of the rise in medical costs can be traced to the jump in the population of the 80-and-over crowd.
The CPI tends to run about a quarter of one percent hotter than the Personal Consumption Expenditure (PCE) deflator, which more accurately captures the tradeoffs that consumers make when deciding on their purchases. It is still below the Fed’s desired target of 2% and one reason the Fed reversed course to cut rates this year. The Fed is now content to return to the sidelines to wait out the effects of those rate cuts. Many within the Fed would welcome a warmer economy with higher wages and slightly higher overall inflation.
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