Commentary Directory

Energy Prices Rise but the Core Disinflationary Trend is Maintained in September

Jacob Hess
October 12, 2023

The US Consumer Price Index (CPI) for September showed a month-over-month (MoM) growth of 0.4% and a year-over-year (YoY) increase of 3.7%, unchanged from August. This was mostly in line with market expectations that inflation rates would remain roughly the same as the previous month. Much of the trends that were evident in August were maintained, and in general, inflation continued its slow cooling outside of energy prices.

From BLS

One of the key drivers of September's inflation was the energy sector. Thanks to hot commodity markets stoked by expectations of low supplies, energy prices followed up their 5.6% MoM increase in August with a 1.5% MoM gain in September. Specifically, gas prices jumped 2.1% MoM, and electricity prices grew 1.3% MoM, both showing consistent uptrends. Natural gas prices are bucking the trend, down -1.9% MoM and -19.9% YoY. Despite the resurgence in energy costs, they are still lower than a year ago, down -0.5% YoY. Without this negative contribution to headline inflation, the CPI would be above 4%.

Food prices grew at a rate of 0.2% MoM for the fourth month out of the last five. The annual rate is now only up 3.7% YoY. A divergence exists in the details segregating food at home and food away from home prices. The food at home index was up 0.1% MoM and 2.4% YoY, while the food away from home index grew 0.4% MoM and is up 6.0% YoY. The larger increases in the latter are likely correlated with stronger services prices from restaurants and bars.

Core inflation, which excludes volatile food and energy prices, cooled down in September to 4.1% YoY from 4.3% YoY in August. The shelter index was once again a significant driver, up 0.6% MoM and 7.2% YoY, accounting for 70% of the YoY increase in core CPI. Other areas in services also showed robust growth: car insurance was up 1.3% MoM, hospital services increased 1.5% MoM, and transport services grew 0.7% MoM. Despit all of this, the annual rate of services inflation edged down -0.2 ppts to 5.7% YoY. The warmer services sector was offset by the very cool goods sector. Goods prices continued their broad deflationary streak with a negative monthly print for the fourth consecutive month. Prices fell in the used cars and trucks index (-2.5% MoM), the apparel index (-0.8% MoM), and the medical care commodities index (-0.3% MoM).

Inflation data continues to be a bit noisy with certain areas like energy and used car & vehicles driving the trends. That’s why the Fed is focused on the “super core” segment. The "super core" inflation, which excludes food, energy, shelter, and used cars, was up 0.2% MoM and 2.8% YoY in September, down from 3.2% YoY in August. The annualized rate of the last three monthly rates is just above 2.4%. The disinflationary trend is intact but hasn't really accelerated. This month's CPI data will likely leave Federal Open Market Committee (FOMC) members' opinions on the next policy step largely unchanged. The next FOMC meeting is at the end of the month, and there's still more data to come that will inform the decision... assuming the government stays open.