The informed consensus on how the Core PCE Price Index (or “deflator”) will print for October will change with the release of the PPI tomorrow. But in the wake of the CPI, the median guess seems to be for a gain of 22 bps. That looks firm. However, there is a 3 bps add from used motor vehicle prices and, I estimate, another 3 bps add from using the lagging government measures of average rents, rather than my measure of observed rents. I would be the first to concede that we definitely strip out the first effect, but that reasonable people will disagree about what to do with the second effect. I would just point out that Fed Chair Powell seems to be with me in stripping that out too. (Maybe he really strips out 2/3 of it.)
So, that leaves 16 bps for the Observed Rent Core PCE Price Index excluding used motor vehicles. And that annualizes to just under 2% — sequentially. Hence, I describe the CPI report this morning as teeing up a return to good inflation data, following last month’s hottish figures, which in turn came in the wake of five good months in a row. There may be some residual seasonality here.
I have no basis yet for assuming that the consensus bean count of the Core PCE Price Index includes any unusual noise from non-market prices. So, if you are interested in how things are shaping up sequentially for October in isolation, the arithmetic above suffices. But non-market prices have been a major issue in recent months. And so, if we want to look at longer-term inflation rates, e.g., the 3- and 12-month rates, then we should probably look at the Market Price Only (MPO) version of the above.
I model that as up13 basis points in October (following 24 bps in September), because non-market prices have a higher trend inflation rate than market prices, which needs to be factored in even if there is no basis for unusual noise from non-market prices. Note that if that guess were to be confirmed, then the 12-month inflation rate would sustain its declining trend, as shown in the chart below. We can argue about whether the 3-month rate is fatally distorted by residual seasonality, but it too ticks down slightly and remains below the 12-month rate, fwiw, which might not be much.
To repeat, I strip out non-market prices so I can get a read on how these slightly longer-term inflation rates are evolving. That gives the cleanest picture of the change. But remember that we need to add back a constant because this measure, while cleaner, is also slightly downward biased for all periods. The 12-month rate is modeled at 2.22% (false precision). Think of that as being consistent with underlying inflation in the goods and services market of perhaps 20 bps higher, at 2.42%. That is still above target (not to imply that is surprising) but apparently moving in the right direction at all frequencies, residual seasonality aside.
Within this, we probably want to put a slightly higher weight on the services component and a slightly lower weight on the goods component. But I do not want to comment on how that plays out this month until I get a better read of how the wise guys see that sectoral mix at the headline level, which would allow me to back out my preferred core measures for each sector. Within the CPI core services ex housing looks firm. And my guess is that services were a bit hotter than goods within the PCE Price Index this month. But there is plenty of room for slippage there, so I will hold off for now.
Data are actual to September and backed out of informed consensus so far for October.
