US inflation falls sharply; helped by fuel and food
The latest consumer inflation print for the US economy for the month of October 2023 has come in sharply lower at 3.2%. That is a full 50 bps lower than the 3.70% inflation reported in the months of August 2023 and August 2023. Even as the inflation situation looks better than the previous two months, the hawks in the FOMC (like Jerome Powell and Michelle Bowman) are likely to be worried about the gap from the target of 2%. Even in his recent speech at the IMF conference, Powell had underlined the need to move fast to bring down inflation closer to the target 2% mark.
Obviously, that has not been possible because the Fed has also tried to avoid a hard landing for the US economy. If anything, there are two concerns for the Fed in this data. Firstly, the core inflation has fallen by just about 10 bps in this month. The sharp fall in headline inflation was largely due to a combination of lower food inflation and sharply lower fuel inflation. However, with the tense situation in West Asia and the Middle East, the oil situation continues to be very volatile.
Food and energy inflation fall; core inflation tapers in October
The 50 bps fall in inflation looked positive for the market sentiments, more so considering that the inflation is also lower than the consensus estimates of 3.3%. The table captures the itemized break-up of the US consumer inflation for October 2023.
Inflation Basket Category |
Oct 2023 (YOY) |
Sep 2023 (YOY) |
Inflation Basket Category |
Oct 2023 (YOY) |
Sep 2023 (YOY) |
Food Inflation |
3.30% |
3.70% |
Core Inflation |
4.00% |
4.10% |
Food at home |
2.10% |
2.40% |
Commodities less food and energy |
0.10% |
0.00% |
|
4.20% |
4.80% |
|
2.60% |
2.30% |
|
0.40% |
0.20% |
|
1.90% |
2.50% |
|
-0.40% |
-0.20% |
|
-7.10% |
-8.00% |
|
1.10% |
0.80% |
|
4.70% |
4.20% |
|
3.30% |
4.00% |
|
3.70% |
4.20% |
|
3.60% |
4.20% |
|
7.20% |
5.60% |
Food away from home |
5.40% |
6.00% |
Services less energy services |
5.50% |
5.70% |
|
4.30% |
5.10% |
Shelter |
6.70% |
7.20% |
|
6.20% |
6.40% |
|
7.20% |
7.40% |
Energy Inflation |
-4.50% |
-0.50% |
|
6.80% |
710% |
Energy commodities |
-6.20% |
2.20% |
Medical Care Services |
-2.00% |
-2.60% |
|
-21.40% |
-5.10% |
|
-1.20% |
-0.20% |
|
-5.30% |
3.00% |
|
N.A. |
4.50% |
Energy services |
-2.30% |
-3.30% |
Transport Services |
9.20% |
9.10% |
|
2.40% |
2.60% |
|
9.60% |
10.20% |
|
-15.80% |
-19.90% |
|
19.20% |
18.90% |
Headline Consumer Inflation |
3.20% |
3.70% |
|
-13.20% |
-13.40% |
Data Source: US Bureau of Labour Statistics
The above food basket would be key to the decision by the Fed. It now looks like another rate hike may be put off for now, especially with the sharp fall in inflation. Of course, the Fed may not change its hawkish view, although it would imply holding higher for longer. There are some encouraging takeaways for the Fed.
MOM inflation tapers to 0.0% in October, after a gap of over 1 year
The US Bureau of Labour Statistics (BLS) reports inflation on yoy basis, as well as on MOM high frequency basis. Here is the month-on-month (MOM) inflation for last 6 months.
Month |
Food (MOM) |
Fuel (MOM) |
Core (MOM) |
Inflation (MOM) |
May 2023 |
0.2% |
-3.6% |
0.4% |
0.1% |
Jun 2023 |
0.1% |
0.6% |
0.2% |
0.2% |
Jul 2023 |
0.2% |
0.1% |
0.2% |
0.2% |
Aug 2023 |
0.2% |
5.6% |
0.3% |
0.6% |
Sep 2023 |
0.2% |
1.5% |
0.3% |
0.4% |
Oct 2023 |
0.3% |
-2.5% |
0.2% |
0.0% |
It is interesting to see how the headline MOM inflation has panned out. Between July and August 2023, MOM inflation spiked from 0.2% to 0.6% but tapered back to 0.4% in September. In October it is back to 0.0% after more than a year. Here are key takeaways from the MOM inflation data for October 2023.
What we read from the October 2023 US consumer inflation
Here are some key points that we gathered from a reading of the US consumer inflation report for October put out by the Bureau of Labor Statistics (BLS).
To sum up the story the fall in inflation reflects the slowing of pace on an inflation juggernaut which is still moving at high base speed. That is the challenge.
Will Fed call off rate hikes; and what will RBI do?
Let us talk of the Fed view point first. The Fed is unlikely to change its stance or use a more dovish language with a sharp fall in inflation. Many Fed officials had prematurely celebrated when consumer inflation had fallen to as low as 3% in June. However, since then inflation in the US spiked all the way to 3.7%, before normalizing again in October 2023. The policy stance would still be cautious as target rates of 2% are still 120 bps away. Fed would wait till headline inflation decisively moves towards 2% and core inflation moves below 3%. However, for that, the Fed will not use the consumer inflation, but the PCE inflation to be announced at the end of this month.
For the RBI, the US consumer inflation will be a key input as it grapples with rising food inflation in India. In the last few months, the overall headline inflation had fallen from 7.44% to 4.7%, but it still remains well above the RBI median inflation target of 4%. For the RBI, it pushes the central bank into a wait-and watch mode for now. After all, for the RBI, the mandate is not just to manage price stability but also to manage inflation expectations. Indian inflation expectations have been reined in the past, when the RBI has stood up to subdue inflation by making money dearer.
What the RBI would be perfectly wary of is that FPI flows have dwindled after a deluge between May and July. In the last 2 months, FPIs have sold close to $4.5 billion in Indian equities. RBI, obviously, already has a Plan-B in place. Rising rates in the US amidst low inflation and static rates in India amidst rising inflation; is not a very healthy combination. The RBI may be able to bide its time in wait and watch mode for some more time now.
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