What’s Behind the Slowdown in U.S. Inflation

October’s U.S. Consumer Price Index (CPI) inflation data was even softer than many observers had expected, with core inflation gaining just 0.3% month-over-month (m/m) versus consensus expectations of 0.5%. Pre-holiday retail discounting, a decline in used car prices, and a welcome easing in rental inflation were key drivers of the overall decline in CPI.

While we would caution against calling a peak in U.S. inflation, as we suspect some of the categories that were particularly weak in October will temporarily re-accelerate in the months ahead, the October data was a welcome sign that the central bank’s actions to date are starting to cool the economy. Consistent with this, October’s data likely solidifies the U.S. Federal Reserve’s resolve to slow its pace of policy rate hikes in December (see our recent blog post, “Fed Sets Up a Pause, Not a Pivot”). October’s CPI report also bolsters our confidence that the Fed will pause when rates enter a 4.5%–5% range, as we discussed in our latest Cyclical Outlook.

October inflation report details: cars, retail goods, rent, health insurance

Most categories saw softer-than-expected inflation readings. Core goods prices were down 0.4% m/m, including in subcategories such as cars and furniture that tend to be more sensitive to interest rates. Services inflation also cooled to 0.5% m/m versus 0.8% m/m in September.

Core goods prices fell following price slashing across used car dealerships. Higher inventories and subdued rental car company buying had contributed to wholesale price declines in prior months; however, it wasn’t until October that dealers more fully passed on these declines to consumers. While this is good news for overall inflation, we believe used car prices may re-accelerate in the months ahead as relatively price-insensitive demand and auto damages from Hurricane Ian temporarily boost prices before they decline once again.

Meanwhile, early holiday discounting from several major retailers contributed to flat retail goods prices overall, and notable declines across household goods (notably furniture, which tends to be sensitive to interest rates) and apparel. We had been expecting to see goods price discounts at some point after inventory-to-sales ratios recovered and as other input costs, including shipping and logistics costs, eased earlier this year. However, this is the first month that CPI data reflected outright price declines across these categories.