Economic Data Tracker –
Inflation cooled in October

Trend watch and what’s new this week

We are encouraged that the economic impact of Hurricane Ian, which have cycled through on the activity-based data (slides 5 and 6) for several weeks, was rather mild. For instance, weekly initial jobless claims in Florida have dropped for four straight weeks for a total of 7,848, or roughly 75% of the 10,665 lost in the week following Hurricane Ian.

That said, Hurricane Nicole made landfall near Vero Beach on Thursday morning, the first hurricane to strike Florida during November in 37 years. There are reports of several deaths, property damage, and power outages. Our thoughts and prayers are with those enduring the wrath of the storm. We anticipate that this storm will also ripple through the activity-based economic data in the coming weeks.

Zooming out, typical seasonality appears to be pulling activity lower as the weather cools and outdoor activities taper. For instance, hotel occupancy fell to 62.4%, though some of that weakness was due to the Halloween calendar shift. Similarly, air passenger counts, and dining reservations have ebbed in recent weeks.

Inflation cooled in October, but still a long way to go

On slide 7, we show the Consumer Price Index (CPI), which rose by 0.4% in October, the same pace as September. The year-over-year pace slipped to 7.7% from 9.1% in June.

On slide 8, core CPI, which excludes food & energy, rose 0.3% month over month, considerably cooler than up 0.6% in September and August. Core CPI increased 6.3% from a year ago, down from 6.6%. Prices rose for services, including shelter (rents) increased 0.7%, its coolest pace in five months.

On slide 9, we look ahead at several CPI scenarios, showing how inflation might unfold over the coming year. It’s quite possible that headline CPI could slip to something with a 4-handle by this time next year from 7.7% currently.

Used car prices quickly recoiling, as are lumber prices

On slide 10, we revisit the price index of used vehicles, which has fallen in eight of the past nine months. In October, prices fell 2.2% MoM and have declined 10.6% on a year-over-year basis, which is a far cry from the 54% spike in April ’21. Luxury cars appear to be getting hit the worst, followed by SUVs.

On slide 11, lumber prices have also dropped dramatically. In fact, lumber prices are now at their lowest level since the 2020 lockdown months. Still, it remains roughly 10% above the year-end 2019 price.

Consumer sentiment slump, but inflation expectations up

Consumer sentiment remains sour. On slide 12, the University of Michigan Consumer Sentiment Survey fell to a preliminary reading of 54.7 in November. That snapped a streak of four straight monthly increases and remains near the lowest level since the series began in 1978. Meanwhile, within the survey, inflation expectations over the next 5-10 years rose to 3.0% in November from 2.7% in September. This is a key indicator for the Federal Reserve (the Fed), which is laser-focused on reining in inflation expectations.

Our take

The cooling inflation situation is encouraging. However, as we have noted here, it is more complicated and more broad-based. In other words, simply seeing gasoline prices dropping is not enough to move the needle. Moreover, one or two months will not be enough for the Federal Reserve (Fed) to stop hiking interest rates. That is especially true given labor market conditions, which are cooling but remain solid.

Nonetheless, inflation has clearly peaked based on various price measures, including used car prices (slide 10) and lumber (slide 11). We are hopeful that inflationary pressures are fading enough to convince Fed decision-makers that it can throttle down the aggressiveness after four straight supersized rate hikes of 0.75%.

While there are several more inflation data points, including wholesale prices and key housing data next week, we think that the Fed will hike by 0.50% at their meeting on December 14 based on how the current data is trending.

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