Mixed signals amid inflation uncertainty

Inflation

Last Wednesday, headline CPI was released at 2.60% year-over-year and core CPI at 3.30% year-over-year. While core CPI was in line with both expectations and last month’s release, headline inflation increased from last month’s 2.40% increase. According to the Bureau of Labor Statistics, shelter was the primary driver of the increase, accounting for over half of the move and rising 0.40% month-over-month, proving to remain stubbornly high. The key drivers of core CPI were used cars/trucks — whose prices typically rise after natural disasters like hurricanes — along with airfares, medical care, and recreation. Meanwhile, falling energy prices contributed to headline CPI, which was comparatively lower than core. Overall, inflation appears to be in a holding pattern, remaining within a 2–3% range. While inflation largely met expectations, markets seem to be growing increasingly cautious about the broader economic outlook and wary of continued inflationary pressures for the future.

Consumption

October retail sales increased by 0.40% month-over-month, slightly higher than expectations of 0.30% and lower than last month’s revised 0.80%. Over the past few weeks, economic data has indicated strong consumption and spending overall. GDP was released at 2.80% for the third quarter, primarily driven by an increase in consumer spending on both goods and services, and retail sales have consistently been revised upwards over the past couple of months. The personal savings rate for September at 4.60% was the lowest level since the beginning of this year, and disposable personal income slowed to a 3.10% increase in the third quarter compared to a 5.00% increase in the second quarter, implying that consumer spending remains strong. Overall, the economic data indicates strength and healthy spending in the U.S. economy but raises a need to cautiously move forward as inflationary risks remain.

FOMC

Last Thursday, Chair Powell spoke to the overall economic outlook saying, “The economy is not sending any signals that we need to be in a hurry to lower rates. The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.” Powell implied that the Fed would take a more neutral stance to its rate-cutting cycle. As of last Friday, markets were pricing in a 60% probability of one 25-basis-point rate cut and a 40% chance that the Fed would keep rates steady for the last Federal Open Market Committee (FOMC) meeting of the year.

The week ahead

Housing starts and building permits are scheduled to be released tomorrow, November 19. Final consumer sentiment numbers are scheduled to be released this Friday, November 22.