A second straight high-side surprise in the core CPI will have the Fed questioning its aggressive start to the easing cycle. Inflation still has some spark. Consumer prices rose more than expected in September, by 0.2%, despite a large decline in gasoline prices. Even food and auto prices, which had calmed down of late, perked up. Clothing prices popped 1.1%, the most in five months. A wider range of services contributed to the upside surprise, notably education, auto insurance, airfares and medical care (after two monthly declines). On the plus side, rents simmered down to a 0.3% advance, with more to come given subdued asking rents. Still, core prices rose 0.3% for a second straight month, kicking the 3-month annualized pace up to 3.1% from just over 2%, and the yearly rate climbed a notch to 3.3%. So-called supercore prices, services less energy and rents, jumped 0.4%, hiking its 3-month rate to 3.8% from just under 2%, and keeping the yearly rate elevated at 4.3% (though down two tenths).

Bottom Line: This is not what the Fed wanted to see after its bold move in September and virtually rules out another large cut in November. While we still lean toward a quarter-point reduction, much will depend on whether we see a second straight strong jobs report in October.

Table 1 - United States — CPI

(month/month % change : s.a.)

Source: BMO Economics, Haver Analytics

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