Economic Data Tracker –
Inflation data stays hotter

Trend watch and what’s new this week

The effects of Hurricane Ian on the activity-based data appear to be waning (slides 5 and 6). For instance, restaurant bookings surged, up 1.1% compared to pre-pandemic levels from -0.4% two weeks ago. Also, air passenger counts jumped 10.3% WoW, with the daily average of 2.26 million, while hotel occupancy rose WoW.

On the other hand, weekly jobless claims increased by 9,000 last week with more than 10,300 in Florida due to Hurricane Ian, which is typical following a storm. While that is a negative to see more jobless claims, it indicates that—excluding Florida—weekly jobless claims declined last week. Again, we expect to see more impact to economic data from Hurricane Ian in the weeks to come.

Inflation remained elevated in September

On slide 7, we show the Consumer Price Index (CPI), which rose by 0.4% in September, though the year-over-year pace slipped to 8.2% from 9.1% in June. On slide 8, core CPI, which excludes food & energy, rose 0.6% month over month and 6.6% from a year ago. Prices rose for services, including shelter (rents) increased 0.8%. On slide 9, we look ahead at several CPI scenarios, showing how inflation might unfold over the coming year.

Meanwhile, wholesale inflation readings, known as producer prices (slide 10), rose 0.4% MoM in September after two straight monthly declines. The pace of core PPI, which excludes food & energy, held steady for a third straight month. Of course, wholesale prices eventually work their way into consumer prices.

On slide 11, rental price growth—from a different data source—has continued to moderate on a month-over-month basis. It rose 0.5% in September, which is back down to the pre-pandemic pace of 0.5%, it was less than half of the 2021 average of 1.3%. Also, the pace declined for the third month in a row and the tenth time in the past 13 months.

Consumer still appears solid despite rising prices

On slide 12, we show retail & food sales, which were flat in September from an upwardly revised 0.4% gain in August. Gasoline sales and auto sales both dropped during September and together those two sectors comprise almost a third of total sales. Excluding both, sales hit a new all-time high.

Consumer sentiment rose again, but inflation expectations up, too

Consumer sentiment continues to improve after being battered this summer thanks to sky-high gasoline prices. On slide 13, the University of Michigan Consumer Sentiment Survey rose for the fourth straight month after crashing in June to the lowest level since the survey began in 1978. Meanwhile, within the survey, inflation expectations over the next 5-10 years rose to 2.9% in October from 2.7% in September. This is a key indicator for the Federal Reserve (the Fed), which is keen on reining in inflation expectations. 

Meanwhile, S&P Global’s U.S. Services Index rose to a reading of 49.3 in September, which still signifies a contraction in activity, from 43.7 in August.      

Used car prices quickly recoiling

On slide 13, we revisit the price index of used vehicles, which has fallen in in seven of the past eight months. In September, prices fell on a MoM and YoY basis. Prices have dropped 13.5% since January ’22 with the luxury car segment getting hit the worst.

Our take

The rebound in the activity-based data following Hurricane Ian is encouraging. Although it is fairly common to see activity recover, seemingly nothing in the past two years has been typical. Importantly, it shows the resilience of the U.S. economy and the American people.

The inflation situation is more complicated and more broad-based. In other words, simply seeing gasoline prices dropping is not enough to move the needle.

Despite some mixed components, it still appears that inflation has peaked based on various price measures. However, consumer spending continues to shift from goods to services, which presents its own cost pressures, especially with a tight labor market. Some might even argue that consumer spending is “too strong”—meaning weaker spending would let the Fed stop raising interest rates—but we view “good news as good news.”

Moreover, the housing-related inflation components are on a considerable lag. For instance, rents appear to be climbing since most leases are for one year or longer and renewals are resetting at higher levels (see slide 11, left chart), even though growth rate of rents is declining (see slide 11, right chart). 

That presents Federal Reserve decisionmakers with a whack-a-mole inflation problem. The Fed doesn’t control gasoline or food production nor rents. Thus, simply tamping down overall activity by increasing interest rates is their only choice, albeit effective but also very painful.

Therefore, given inflationary pressures aren’t fading fast enough, the Fed can’t relax its aggressive stance against inflation just yet. The September inflation data, along with September the jobs report, likely bolsters the case for another supersized three-quarter point (0.75%) rate hike at the next Fed meeting on November 2. 

Of course, this uncertainty has caused U.S. stock and bond markets to have big swings in both directions this week. Our core thesis remains that markets will likely stay in choppy waters.

Ultimately for markets, the prospects of higher interest rates increase the likelihood of a recession or at the very least a further slowdown in economic activity. We agree. 

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