Inflation is not going away quietly. The Consumer Price Index (CPI) rose 0.24% in October, the largest unrounded monthly uptick since April. This bump brought the 12-month rate to 2.6%, the first annual acceleration since inflation’s hot streak in Q1. Perhaps most discouraging is the stickiness in core services. Services prices excluding energy have posted monthly gains between 0.3% and 0.4% in each of the past four months. Shelter inflation picked up in October, driven by hikes in both rent and owners’ equivalent rent. Outside of shelter, prices rose at a steady clip for airfare, recreation services and motor vehicle maintenance and repair, which was partially offset by lower costs for motor vehicle insurance.
Zooming out, inflation is continuing to progress lower, but the last mile is looking harder to achieve. First, the goods sector is no longer the deflationary force it once was. Despite going essentially unchanged in October, core goods prices rose on an unrounded basis for the second month in a row (+0.05%), driven by a 2.7% jump in used vehicle prices. Second, although shelter prices are calming on an annual basis, the expected disinflation in shelter remains painfully slow. Elevated producer prices further complicate the ride back down to 2%. The Producer Price Index (PPI) rose in line with consensus expectations, but sturdy price growth in PPI subcomponents like portfolio management and airline passenger services present some upside risk to the Fed’s preferred inflation gauge in October.
Looking ahead, slower wage growth, higher productivity growth and more price-sensitive consumers should continue to gradually reduce price pressures. That said, slower progress on inflation in recent months may prompt the Fed to reevaluate its pace of easing moving forward. Add to that the prospects of a tariff-driven inflationary rebound, and the Fed is likely to exercise more caution in its monetary policy decisions next year.
Elsewhere, the Fed’s first rate cut in September already seems to have improved borrowing conditions for small businesses. The NFIB Small Business Optimism Index rose 2.2 points in October alongside a dip in the regular interest rate paid by borrowers. The survey revealed a notable improvement in economic expectations, with the net share of firms expecting the economy to improve over the next six months reaching its highest level in nearly four years. But looking past headline optimism, current small business conditions appear shaky at best. The survey question gauging sales activity in October plummeted to its weakest reading since July 2020. Hiring plans also continued to stall, remaining essentially unchanged since May. Price pressures are still a challenge in certain industries, like construction, faced with high costs and scarcer labor supply.
Lower interest rates are also expected to create a more favorable environment for U.S. production. Overall industrial production dipped 0.3% in October after a downwardly revised 0.5% slide in September. Hurricanes and labor strikes exerted some drag, but the Fed estimates the impact was minimal. In the broader sense, industrial production has been struggling for some time and is up by less than 3% since 2017. The reality is even worse for manufacturers. As discussed in Topic of the Week, manufacturing output has been treading water amid the high interest rate environment. Manufacturing production has declined in three of the past four months and sits 1.5% below its 2017 level. The silver linings of October’s report, if there are any, are that the drop in IP was less harsh than expected and utilities and mining were able to eke out slight gains.
To cap off the week, October’s retail sales report gave us a first look into consumers’ headspace heading into the holidays. Overall retail sales surpassed expectations with a 0.4% over-the-month increase. September’s data were also revised to double its original strength, likely to prompt upward revisions to Q3 GDP growth. Resilience to date can be explained by robust consumer income, which itself was revised substantially higher in this year’s annual NIPA revisions. With this in mind, the 0.1% giveback in control group sales in October is not terribly concerning. The strong finish to Q3 puts consumers on track for decent spending in Q4, but the days of extraordinary leaps are likely behind us. Our current forecast has holiday sales rising 3.3% over last year, which would more or less represent a return to "average."
This Week's State Of The Economy - What Is Ahead? - 09 April 2020
Wells Fargo Economics & Financial Report / Apr 10, 2020
The Federal Reserve announced a series of measures this morning that are intended to assist households, businesses and state & local governments as they cope with the economic fallout of the COVID-19 outbreak.
This Week's State Of The Economy - What Is Ahead? - 05 June 2020
Wells Fargo Economics & Financial Report / Jun 09, 2020
Data this week continued to suggest the U.S. economy hit rock bottom in April. Still, it is a long road to recovery and the pickup in economic activity will be gradual.
This Week's State Of The Economy - What Is Ahead? - 25 February 2022
Wells Fargo Economics & Financial Report / Feb 27, 2022
What a crazy week. It’s hard to worry about something as relatively unimportant as economic trends when one thinks about what folks in Ukraine are enduring, but economies are nonetheless impacted.
This Week's State Of The Economy - What Is Ahead? - 01 March 2024
Wells Fargo Economics & Financial Report / Mar 05, 2024
Economic data were downbeat this week, as downward revisions took some of the shine out of the marquee headline numbers. Despite the somewhat weak start to Q1, economic growth continues to trek along.
This Week's State Of The Economy - What Is Ahead? - 21 February 2020
Wells Fargo Economics & Financial Report / Feb 22, 2020
Minutes from the January 28-29 FOMC meeting indicate the coronavirus will not push the Fed to cut interest rates, and for the most part housing and manufacturing survey data this week supported that view.
This Week's State Of The Economy - What Is Ahead? - 20 December 2024
Wells Fargo Economics & Financial Report / Dec 23, 2024
The strength in demand has hindered progress on disinflation, exemplified by the PCE deflator inching up a tenth to 2.4% year-over-year in November.
This Week's State Of The Economy - What Is Ahead? - 13 August 2021
Wells Fargo Economics & Financial Report / Aug 19, 2021
The general outlook remains positive as households have accumulated over $2T in excess savings on their balance sheets and net worth has risen across all income groups.
This Week's State Of The Economy - What Is Ahead? - 07 March 2025
Wells Fargo Economics & Financial Report / Mar 11, 2025
The labor market appears to be holding up amid an onslaught of tariff decisions and rescissions. The U.S. economy added 151K jobs in February, only modestly below economist expectations of 160K.
This Week's State Of The Economy - What Is Ahead? - 25 October 2024
Wells Fargo Economics & Financial Report / Oct 31, 2024
The housing sector was in focus this week. During September, existing homes sales remained in a slump and declined to a fresh cycle low, while new home sales bucked the trend and rose solidly.
This Week's State Of The Economy - What Is Ahead? - 06 January 2023
Wells Fargo Economics & Financial Report / Jan 12, 2023
During December, payrolls rose by 223K while the unemployment rate fell to 3.5% and average hourly earnings eased 0.3%. Job openings (JOLTS) edged down to 10.46 million in November.
