Summary
This morning’s CPI report was arguably the most encouraging one the FOMC has received since it began its inflation fight nearly two and a half years ago. Consumer prices declined by 0.1%, led lower by a drop in energy prices and a modest increase in food prices. Excluding food and energy, the core CPI increased by just 0.1% (0.06% unrounded), which was the smallest increase since January 2021, a time when high inflation was far from most minds. The slowdown in core CPI inflation was broad-based, with core goods prices once again declining and core services inflation advancing only 0.1% compared to the previous six-month average gain of 0.4%. A leg down in shelter inflation was a key contributor, but drops in more discretionary spending categories like airfares (-5%), lodging away from home (-2%) and recreation services (-0.1%) also played a role in the softer reading.
On balance, the economic data are the most supportive of a rate cut that they have been all year. Over the past three months, the core CPI has increased at a 2.1% annualized pace. This marks the smallest three-month change in core prices since March 2021. Furthermore, it is not just the inflation data that have shown signs of cooling in recent months. A deceleration in employment and a rise in the unemployment rate are just a couple of the numerous indicators that are pointing to less heat in the U.S. labor market.