Thoughts

October 11, 2024 | 15:06

U.S. Inflation Déjà Vu?

Economist

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

On the surface, the U.S. inflation waters appear calm. Consumer prices rose 0.2% in September, chipping the annual rate down to 2.4%. But you don’t need to wade far to feel the undertow. Cheaper fuel tempered the rise but has since reversed higher. Grocery bills rose as much last month (0.4%) as in the prior seven. Unexpected strength in clothing and autos led to the first increase in core goods prices in seven months. Falling goods prices were providing a partial offset to the rising cost of services, until last month. Worse, services costs picked up, with the ‘supercore’ index leaping 0.4%, the most in five months. Core prices advanced 0.3% for a second month in a row, and not just because of a few special items. The Cleveland Fed’s trimmed-mean and median CPI indexes both climbed 0.3% as well. At a minimum, the data suggest the road back to price stability will remain bumpy, partly because overall consumer spending remains strong.

Yet, a pathway back to 2% still exists. The peaks in recent core price increases have been lower than the string of three straight 0.4% gains that rang in the new year. Spikes in college tuition and doctor services fees last month likely won’t be repeated. A (belated) moderating trend in measured rent should continue amid ample apartment construction in recent years. Natural gas costs are low due to an abundance of supply, which will limit home heating costs this winter. Budget-constrained lower-income families have been pinched by higher living costs, compelling more companies to discount such items as appliances, furniture and toys to spur demand. Most importantly, despite large wage settlements for some unionized workers, labour cost increases have moderated, with the employment cost index slowing to 4.1% y/y in Q2, a more than two-year low. Meantime, growth in labour productivity shows little sign of fading. Given flat work hours and expected GDP growth above 2% in Q3, another solid productivity gain should help companies absorb wage increases with little hit to the bottom line and little urge to raise prices.

True, if core prices do pop again in October, we may need to start bailing. The November 5 elections could also usher in a boatload of new tariffs and even more stimulative fiscal policy, stirring the inflation waters. But if the economy settles down close to its long-run potential rate of around 2%—as the Fed forecasts for the next three years and is actively trying to achieve—then inflation should also settle down to 2% by early next year.