US inflation falls to 3.2% in October, led by food and fuel inflation

15 Nov 2023 , 10:18 AM

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%
Cereals and bakery products	4.20%	4.80%	Apparel	2.60%	2.30%
Meats, poultry, fish, and eggs	0.40%	0.20%	New vehicles	1.90%	2.50%
Dairy and related products	-0.40%	-0.20%	Used cars and trucks	-7.10%	-8.00%
Fruits and vegetables	1.10%	0.80%	Medical care commodities	4.70%	4.20%
Non-alcoholic beverages	3.30%	4.00%	Alcoholic beverages	3.70%	4.20%
Other food at home	3.60%	4.20%	Tobacco and smoking products	7.20%	5.60%
Food away from home	5.40%	6.00%	Services less energy services	5.50%	5.70%
Full service meals and snacks	4.30%	5.10%	Shelter	6.70%	7.20%
Limited service meals	6.20%	6.40%	Rent of primary residence	7.20%	7.40%
Energy Inflation	-4.50%	-0.50%	Owners’ equivalent rent	6.80%	710%
Energy commodities	-6.20%	2.20%	Medical Care Services	-2.00%	-2.60%
Fuel oil	-21.40%	-5.10%	Physician Services	-1.20%	-0.20%
Gasoline (all types)	-5.30%	3.00%	Hospital Services	N.A.	4.50%
Energy services	-2.30%	-3.30%	Transport Services	9.20%	9.10%
Electricity	2.40%	2.60%	Motor vehicle Maintenance	9.60%	10.20%
Natural gas (piped)	-15.80%	-19.90%	Motor vehicle insurance	19.20%	18.90%
Headline Consumer Inflation	3.20%	3.70%	Airline Fare	-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.

• Between July 2023 and September 2023 headline inflation spiked from 3.2% to 3.7%. During this same period, the food inflation fell 120 bps from 4.90% to 3.70% on yoy basis. In October 2023, the food inflation has tapered further to 3.30%, while the headline inflation has been led lower by 50 bps to 3.2%.

   

• It is the components of the food basket that is interesting. Except, meat, poultry, and fruits, all the other components of the food basket are lower than September. The steepest fall was visible in the food basket in cereals and non-alcoholic beverages.

   

• The real action was in the energy basket. After hardening to -0.50% last month, the energy inflation is now deeper in the negative at -4.5% on the back of a higher oil price base and factoring in the sharp fall in crude prices in this month.

   

• Core inflation has eased by just about 10 bps from 4.10% to 4.00%, but that comes on the back of a steep 60 bps fall last 2 months from 4.70% to 4.10%. That is good news as it hints at lower structural inflation in the US economy. Above all, the core inflation at 4% for October 2023 is the lowest level of core inflation in the last 28 months.

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.

1. MOM food inflation in October 2023 rose higher at 0.3%. A total of 4 out of the 6 store food categories saw higher inflation. Meat, poultry, fish prices spiked 0.7%, beef 1.2%, pork 1.3%. Cereals was more subdued in the month.

    

2. Energy index dipped -2.5% MOM in October 2023 as energy commodities like gasoline dipped -5%, even as natural index prices rose 1.2% and electricity rose by 0.3%. It was the sharp fall in gasoline that resulted in negative MOM energy inflation in October.

    

3. Core inflation growth was lower at 0.2% MOM in October 2023.  The inflation pressure comes largely from shelter, which was the big driver of MOM core inflation. While medical care saw higher MOM inflation, used cars saw a sharp fall of -0.8% MOM.

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). 

• For the month of October 2023, the yoy Consumer Price Index (CPI inflation) came in at 3.2%. This is a good 50 basis points lower than the 3.7% yoy inflation recorded by the US economy for the month of September. The energy inflation effect has been largely neutralized in the month of October 2023. 

   

• US consumer price inflation cooled more than expected. The street expectation was that consumer inflation for October 2023 would come in at 3.3%, but actual consumer inflation for October came in at 3.2%. This is likely to be sentimentally positive for the US economy in particular and the global economy in general.

   

• It was not just the yoy inflation that was lower than the consensus, but even the MOM inflation came in lower at 0.0% as compared to the 0.1% that the street had anticipated. Fall in MOM inflation is a good lead indicator of lower yoy inflation in the long term.

   

• On a you basis and also on an MOM basis, the energy prices dropped significantly in the month of October 2023. This was largely led by a sharp fall in gasoline prices. However, the fall in energy inflation was largely offset by sustained rise of shelter costs.

   

• While the food inflation was lower at 3.30% for the quarter, what really matters is that the level of food inflation currently on a yoy basis has not been so low since the middle of 2021. High menu prices have not changed the food narrative.

   

• While the core inflation on a MOM basis was 0.2%, the yoy core inflation came in at 4%. This is the structural side of inflation basket, excluding food and energy. However, the yoy core inflation of 4% is the lowest since September 2021.

   

• Despite the lower inflation, it does not look like the Fed officials are too happy. That is not surprising for two reasons. This fall in inflation is just the reversal of the spike in inflation seen since July 2023. Also, the consumer inflation at 3.2% is still a full 120 basis points away from the Fed target of 2%. That is why, the Fed still feels that despite the fall, inflation is still too high for comfort.

   

• The current challenge for American households is that they are caught between high inflation and high interest rates; and both are pinching their budgets. Most are looking at this fall in CPI inflation for October as a mere slowing of pace. However, the base speed still continues to be very high.

   

• Most economies point out that the problem is not so much about rate but about a tight labour market, robust wage growth and sustained spending by US households. In fact, data suggests that the US households continue to spend even amidst tightness and as long as this sustains, then the robust demand will prevent inflation from falling too sharply. Discretionary spending still holds the key.

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.