US October inflation bounces 20 bps to 2.6% as energy gains saturate

9 Dec 2024 , 01:21 PM

INFLATION DATA UNDERLINES COMPLEX TREND

The October 2024 consumer (CPI) inflation announced by the US Bureau of Labour Statistics (BLS) on November 13, 2024 came in 20 bps higher at 2.6%, compared to 2.4% in September 2024. It may be recollected that headline consumer inflation in the US had fallen by 40 bps between July and August 2024; paving the way for aggressive 50 bps rate cut in September. In fact, it was a combination of two factors that triggered the 50 bps rate cut. There was the unemployment that was persistently sticky in the range of 4.2% to 4.3%, and the consumer inflation that was moving decisively towards the 2% target. The Fed uses the PCE inflation and not the CPI inflation as the benchmark for deciding on rate action, although the CPI inflation does set the tone. In October, food inflation was lower and core inflation was flat; but the spike in the headline inflation came from energy deflation saturating.

ENERGY PRICES TRIGGER BOUNCE IN US OCTOBER INFLATION

To be fair, energy inflation is still in the negative, but the gains of the last few months has saturated and geopolitical risk is causing the oil deflation gains to saturate. Here is a comprehensive look at the break of the yoy US inflation of 2.6% for October 2024.

Inflation Basket Category	Oct 2024 (YOY)	Sep 2024 (YOY)	Inflation Basket Category	Oct 2024 (YOY)	Sep 2024 (YOY)
Food Inflation	2.10%	2.30%	Core Inflation	3.30%	3.30%
Food at home	1.10%	1.30%	Commodities less food and energy	-1.00%	-1.00%
·          Cereals and bakery products	0.90%	0.10%	·          Apparel	0.30%	1.80%
·          Meats, poultry, fish, and eggs	1.90%	3.90%	·          New vehicles	-1.30%	-1.30%
·          Dairy and related products	1.30%	0.50%	·          Used cars and trucks	-3.40%	-5.10%
·          Fruits and vegetables	0.90%	0.70%	·          Medical care commodities	1.00%	1.60%
·          Non-alcoholic beverages	1.70%	1.30%	·          Alcoholic beverages	1.60%	1.50%
·          Other food at home	0.40%	0.40%	·          Tobacco and smoking products	6.80%	8.20%
Food away from home	3.80%	3.90%	Services less energy services	4.80%	4.70%
·          Full service meals and snacks	3.70%	3.90%	Shelter	4.90%	4.90%
·          Limited service meals	3.80%	4.10%	·          Rent of primary residence	4.60%	4.80%
Energy Inflation	-4.90%	-6.80%	·          Owners’ equivalent rent	5.20%	5.20%
Energy commodities	-12.40%	-15.30%	Medical Care Services	3.80%	3.60%
·          Fuel oil	-20.80%	-22.40%	·          Physician Services	3.10%	1.50%
·          Gasoline (all types)	-12.20%	-15.30%	·          Hospital Services	3.90%	4.50%
Energy services	4.00%	3.40%	Transport Services	8.20%	8.50%
·          Electricity	4.50%	3.70%	·          Motor vehicle Maintenance	5.80%	4.90%
·          Natural gas (piped)	2.00%	2.00%	·          Motor vehicle insurance	14.00%	16.30%
Headline Consumer Inflation	2.60%	2.40%	·          Airline Fare	4.10%	1.60%

Data Source: US Bureau of Labour Statistics

The consumer inflation above acts as a lead indicator for PCE inflation and sets the tone for PCE inflation. That is the reason, consumer inflation assumes significance. Here are key takeaways from the data.

• Let us start with food inflation. Between September 2024 and October 2024, food inflation was down 20 bps at 2.1%. The upward thrust to food inflation came from cereals, dairy products, and non-alcoholic beverages. However, the downward pressure on the food basket came from meat, fish, eggs, and food away from home.
• Energy inflation bounced 190 bps from -6.8% to -4.9% between over last month. In the energy basket, there were no deflating items. The price pressure came from fuel oil, gasoline, and electricity; piped natural gas was flat.
• What about core inflation, which was flat at 3.3%? The upward pressure came from used cars & trucks, physician services, motor vehicles maintenance, and airline fares. On the other hand, downward pressure on prices was visible in apparel, medical care products, tobacco products, hospital services, and motor vehicles insurance.

The consumer inflation moving up by 20 bps could be a concern for the Fed as it moves the compass nearly 60 bps away from the long term inflation target of 2%.

OCTOBER 2024 MOM INFLATION FLAT SINCE JULY

Here is the month-on-month (MOM) inflation for last 6 months.

Month	Food (MOM)	Energy (MOM)	Core (MOM)	Headline (MOM)
May 2024	0.1%	(2.0%)	0.2%	0.0%
Jun 2024	0.2%	(2.0%)	0.1%	(0.1%)
Jul 2024	0.2%	0.0%	0.2%	0.2%
Aug 2024	0.1%	(0.8%)	0.3%	0.2%
Sep 2024	0.4%	(1.9%)	0.3%	0.2%
Oct 2024	0.2%	0.0%	0.3%	0.2%

Data Source: US BLS (negative figures in brackets)

The headline MOM inflation has been flat at 0.2% since July 2024. Here is what we read from the break-up of the MOM US consumer inflation for October 2024.

1. MOM food inflation in October 2024 was up 0.2%; compared to 0.4% in September. Out of the 6 store food categories; 5 saw an increase in inflation and only 1 was down. The inflation spike MOM was visible in cereals & bakery products, dairy products, fruits & vegetables, non-alcoholic beverages, and other food at home. The index for meat, poultry, fish & eggs saw a fall in October.
2. The MOM Energy inflation was unchanged at 0.0% in October 2024, compared to -1.9% in September. The gasoline index fell by -0.9% on a MOM basis. However, the electricity index increased by 1.2% while the index of natural gas was up 0.3% MOM.
3. The MOM Core inflation growth was 0.3% in October 2024 the same level for the last 3 months. The upward pressure comes shelter index at 0.4%, owners equivalent rent up by 0.4%, and index for rent 0.3%. Among other items in the core basket, apparel index fell by -1.5% and the communication index down -0.6%.

Overall, the high frequency MOM inflation was flat but that was largely thanks to the deflationary impact of food basket, which offset the inflationary impact of energy.

CME FEDWATCH OPTIMISM ON RATE CUTS WANING

One way to look at the Fed outlook from a market perspective is to evaluate the CME Fedwatch; which captures the probabilities of rate moves at each upcoming Fed meet. This is based on implied probabilities of Fed Futures trading.

Fed Meet	225-250	250-275	275-300	300-325	325-350	350-375	375-400	400-425	425-450	450-475
Dec-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	82.3%	17.7%
Jan-25	Nil	Nil	Nil	Nil	Nil	Nil	Nil	26.5%	61.7%	11.9%
Mar-25	Nil	Nil	Nil	Nil	Nil	Nil	15.4%	46.9%	32.8%	5.0%
May-25	Nil	1.1%	Nil	Nil	Nil	4.0%	23.5%	43.3%	25.6%	3.7%
Jun-25	Nil	Nil	Nil	Nil	1.8%	12.9%	32.5%	35.2%	15.6%	2.0%
Jul-25	Nil	Nil	Nil	0.4%	4.1%	16.9%	33.1%	31.2%	12.8%	1.6%
Sep-25	Nil	Nil	0.1%	1.1%	6.6%	20.0%	32.7%	27.6%	10.6%	1.3%
Oct-25	Nil	Nil	0.2%	1.6%	7.9%	21.3%	32.2%	26.0%	9.7%	1.2%
Dec-25	Nil	Nil	0.3%	2.2%	9.1%	22.2%	31.6%	24.5%	9.0%	1.1%

Data source: CME Fedwatch (# – lower probabilities consolidated)

The CME Fedwatch has been broken up into 3 milestones; December 2024, June 2025, and December 2025. The probabilities of rate cuts and the eventual rates at each of these milestone has been evaluated. This is after the November 25 bps rate cut (taking total rate cuts to 75 bps since September 2024).

• With 50 bps rate cut in September and another 25 bps in November, the action now shifts to the last meeting of the year in late December. The CME Fedwatch assigned a probability of 82.3% to another 25 bps rate cut and 17.7% probability of status quo.
• Probabilities beyond 2024 are still evolving and will offer more clarity once the current year action is fully known by end of December. Let us look at June 2025. The CME Fedwatch is assigning 82.4% probability for 125 bps rate cuts from the peak and 47.2% chance for 150 bps rate cuts from the peak by June 2025.
• Let us come to the final milestone of December 2025. At this point, the CME Fedwatch is estimating 65.4% probability for 150 bps of rate cuts from the peak and a probability of 33.8% for 175 bps of rate cuts by December 2025. There is a 11.6% probability that the Fed could close year 2025 having cut rates by a full 200 bps from peak and moved to (3.25%-3.50%).

100 bps rate cut in 2024 looks very likely. However, the whole of 2025 may only see another 50 bps rate cut and it could go up to 75 bps in 2025 only if there was a visible hard landing, not otherwise. Our reading is that by end of 2025, the total rate cuts would most likely by 150 bps and a remotely possible 175 bps. CME Fedwatch has toned down its dovishness substantially. Remember, Trump has never been a great proponent of aggressive rate cuts. May be that is the political scepticism that the CME Fedwatch is depicting now!