The U.S. October Consumer Price Index (CPI) report showed consumer prices rose at their fastest pace since 1990 as supply chain issues showed little signs of abating. Headline CPI came in well above expectations at +0.9% month-over-month (m/m) and +6.2% year-over-year (y/y). Excluding food and energy components, Core CPI rose 0.6% m/m and 4.6% y/y, also beating expectations. This morning’s report suggests inflationary pressures are broadening, reflecting both a pickup in stickier components and the continued impact of supply shortages on consumer prices.
Inflation is accelerating in a broad range of consumer goods and services such as oil, rents, food, hospital services, and new and used vehicles. As the global semiconductor shortage continues to limit inventories and drive up costs, the prices for new vehicles rose 1.4%, and used vehicle prices jumped 2.5% after two months of declines. Food prices increased by 0.9% and energy prices surged by 4.8%, led by higher gasoline prices (+6.0%). Shelter costs, which are a more structural component of the CPI, continued their upward momentum from September and rose 0.5% as higher rents and home prices feed into the data.
With this morning’s figures, we estimate that the headline and core personal consumption expenditure (PCE) deflators will rise 0.8% and 0.5% in October, respectively. This would result in headline PCE inflation of 5.2% y/y and core PCE inflation of 4.2% y/y. Our current estimate for fourth quarter PCE inflation is now more than 5% y/y, markedly higher than the Federal Reserve’s (Fed’s) current and upward revised forecast for 4.2% and its long-term target of 2.0%.
Against a backdrop of solid demand, businesses have had the confidence to steadily raise prices for consumer goods and services while supply chain bottlenecks and worker shortages drive up input costs. These costs have yet to show signs of abating, as data on Tuesday showed that prices paid to U.S. producers continued to accelerate last month. Further, adding to concerns about persistent price pressures across the globe, China’s inflation at the factory level increased by the most in 26 years last month.
Recent reports have suggested that inflation is becoming more widespread and stickier than policymakers and financial participants have expected. As the Fed begins reducing its monthly bond purchases, the transitory argument is looking harder to make. Together with persistent wage increases, the Fed may need to tighten policy more quickly than has been indicated. Markets are also taking up this debate and following this report, U.S. stocks dropped, gold gained, the yield on the 10-year Treasury rose and the dollar strengthened.