US October inflation tapers to 7.7% but MOM inflation is higher

11 Nov 2022 , 09:49 AM

Since March 2022, when the Fed hawkishness first manifested, the Fed has hiked rates by 375 basis points. However, till June 2022, inflation was on the ascendant, when the US consumer inflation peaked at 9.1%. Since then, the inflation has gradually tapered from 9.1% to 7.7%. While a 140 bps fall may not sound substantial, what is notable is that in October 2022, the consumer inflation was lower than the consensus street expectation.

Consumer inflation in October 2022 is significant for one more reason. It is the first month since February 2022 that US consumer inflation fell below 8%. Inflation had stayed above the 8% mark for 7 months in succession since March 2022. As the Fed has put it very aptly in the recent FOMC statement, “Rate hikes can only do part of the job in containing inflation by restricting consumption. The tougher job has to happen at the supply side, which will have a time lag”. Inflation touched a peak of 9.1% in June 2022 and then tapered to 8.5% in July, 8.4% in August and 8.2% in September. In October 2022, consumer inflation has fallen decisively to 7.7%. The chart below captures consumer inflation trend in the US. The blue line shows headline inflation trend while red line captures core inflation trend of last 1 year.

Chart Source: US Bureau of Labour Statistics

There were some interesting trends visible in the month of October 2022. The yoy inflation was lower across all the 3 major categories viz. food inflation, energy inflation and core inflation. Of course, the tapering in food and core inflation was not too substantial and just about 30 to 50 basis points. But in the food basket, the (food at home) category has seen a sharp fall in inflation, which is a good signal. Core inflation tapered by about 30 bps from 6.6% to 6.3%, but most of the core inflation is coming from energy related services and transport services; both functions of fuel prices.

After a long gap, US sees inflation falling across categories

If you look at headline inflation over the last 3 months, it fell by 90 bps from 9.1% in June 2022 to 8.2% in September 2022. However, food inflation and core inflation continued to remain elevated on account of supply chain bottlenecks. On the energy front, the price of crude has fallen sharply on recession concerns and that kept the oil inflation under check. However, the month of October 2022 saw inflation falling across all the three categories as can be seen in the table below. However, there are still two risks to inflation. Firstly, the OPEC is keen on keeping Brent Crude prices around $100/bbl, so more supply cuts are likely. Secondly, the Russia Ukraine war continues and the tougher EU sanctions kick in from December 2022. That could disrupt global food basket flows.

Category	Oct 2022 (YOY)	Category	Oct 2022 (YOY)
Food Inflation	10.90%	Core Inflation	6.30%
Food at home	12.40%	Commodities less food and energy	5.10%
Cereals and bakery products	15.90%	Apparel	4.10%
Meats, poultry, fish, and eggs	8.00%	New vehicles	8.40%
Dairy and related products	15.50%	Used cars and trucks	2.00%
Fruits and vegetables	9.30%	Medical care commodities	3.10%
Non-alcoholic beverages	12.70%	Alcoholic beverages	5.00%
Other food at home	15.40%	Tobacco and smoking products	6.60%
Food away from home	8.60%	Services less energy services	6.70%
Full service meals and snacks	9.00%	Shelter	6.90%
Limited service meals and snacks	7.10%	Rent of primary residence	7.50%
Energy Inflation	17.60%	Owners’ equivalent rent	6.90%
Energy commodities	19.30%	Medical Care Services	5.40%
Fuel oil	68.50%	Physician Services	1.80%
Gasoline (all types)	17.50%	Hospital Services	3.80%
Energy services	15.60%	Transport Services	15.20%
Electricity	14.10%	Motor vehicle Maintenance	10.30%
Natural gas (piped)	20.00%	Motor vehicle insurance	12.90%
Headline Consumer Inflation	7.70%	Airline Fare	42.90%

Data Source: US Bureau of Labour Statistics

There are a few broad trends that are emerging in terms of data flows. Firstly, food inflation has fallen on a yoy basis, but remains 0.6% higher on a sequential basis. In the food basket, vegetables and fresh fruits saw a fall in sequential inflation. Food at home inflation is down but food away from home inflation is up. Secondly, under the energy category, fuel oil saw yoy inflation rise from 58% to 68%. However, this was more than offset by a fall in gasoline inflation as well as a fall in the price of electricity and piped gas supplies. Lastly, core inflation has tapered, but the pressure is still coming from fuel related services like energy services, airline fares and transport related services. That is still fuel inflation dependent.

High frequency inflation stays sticky in October 2022

The US Bureau of Labour Statistics (BLS) reports inflation on a yoy basis, as well as on a MOM high frequency basis. The chart below captures the trend of MOM inflation. After touching a low of 0.00% in July 2022, the MOM inflation has again bounced back. While it is below the 1% mark, it remains sticky at 0.4%, the same rate as in September 2022.

Chart Source: US Bureau of Labour Statistics

Between June and July, the MOM inflation fell from 1.30% to 0.00% and has since bounced back to 0.4% over the last 3 months. Here are some key takeaways.

1. MOM food inflation increased 0.6% with 4 out of 6 heads of groceries up. Inflation was higher for meats, cereals and bakery products but lower for fruits and vegetables.
2. Energy index rose 1.8% MOM in October after falling 3 months in a row. While electricity increased marginally by 0.1%, the MOM index for natural gas was sharply down -4.6%.
3. Core inflation rose 0.6% in August and September and is up 0.3% MOM in October 2022. Most of the pressure is coming from oil related energy services, airfares and transport.

Fed will stay hawkish, but to a lesser extent

For now, the Fed is likely to stay hawkish. However, the November FOMC statement had already hinted at a less aggressive approach to rate hikes, going ahead. With inflation sharply down to 7.7% yoy for October, Fed will have an incentive to hit the pause button and restrict itself to just 50 bps in December, or even lower. Rate hikes may not be over, but it may be more decisively close to the peak. It is still likely to stick to its terminal rate target of 5% at the very least. The dollar strength is giving headaches to the Fed and they would now prefer to go slow. How will US October inflation impact India?

The inflation number at 7.7% brings two distinct positives for India. Firstly, the RBI will feel less pressure of monetary divergence. RBI had already raised rates by 190 bps and now the RBI can afford to go slow at its next meeting in December. That is also good news at a time when India cannot really afford to forsake its growth franchise. Secondly, Fed hawkishness and risk of recession had come at a time when India was betting big on exports. The sharp fall in US inflation will reduce the risk for India’s export growth. In addition, this will also enable the highly profitable Indian IT sector to procure a bigger share of tech spending. That is the real value proposition for India.