Weekly Update 11/15/2024: US October CPI Comes in as Expected
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Domestic Economic News
A measure of underlying US inflation remained firm in October, underscoring the ongoing risks Federal Reserve officials face in trying to bring price pressures fully under control. The so-called core consumer price index — which excludes food and energy costs — increased 0.3% for a third month and 3.3% from a year ago, Bureau of Labor Statistics figures showed Wednesday. Economists see the core gauge as a better indicator of the inflation trend than the overall CPI. That measure, which includes food and energy, rose 0.2% for a fourth month and 2.6% from a year before, marking the first acceleration on an annual basis since March. The BLS said shelter accounted for over half of the overall monthly advance. The figures underscore the slow and frustrating nature of the battle against inflation, which has often moved sideways — sometimes for months at a time — on its broader path down. The latest numbers, along with strong consumer spending and economic growth, will keep Fed officials cautious as they debate how quickly to reduce borrowing costs in the months to come.
US stock futures rose while Treasury yields and the dollar fell. Traders marked up the odds of a December rate cut to around 70%, from about 60% prior to the release. Some measures of inflation expectations also remain somewhat elevated among consumers and businesses, a potentially worrisome sign after years of robust price pressures. Prices of used cars rose 2.7%, the most in over a year, and hotel rates climbed 0.4%, possibly reflecting damage and evacuation orders from Hurricanes Helene and Milton. Airfares continued to rise, and health insurance rose 0.5% as the BLS updated source data on premiums. Motor vehicle insurance fell slightly. Shelter prices, the largest category within services, rose 0.4%, marking an acceleration from the prior month. Owners’ equivalent rent — a subset of shelter and the biggest individual component of the CPI — rose by the same amount. Excluding housing and energy, service prices rose 0.3%, less than in September, according to Bloomberg calculations. While central bankers have stressed the importance of looking at such a metric when assessing the overall inflation trajectory, they compute it based on a separate index. That measure — known as the personal consumption expenditures price index — doesn’t put as much weight on shelter as the CPI does, which is one reason why it’s trending closer to the Fed’s 2% target. Goods prices excluding food and energy, meanwhile, rose for a second month. They had consistently fallen over much of the past year. However, excluding used cars, core goods prices fell 0.2%, marking the largest drop in 2024. The PCE measure draws from the CPI as well as certain categories within the producer price index. Several of the CPI items that registered robust gains, like health insurance and airfares, won’t feed through to the PCE, which should help keep that gauge relatively muted when the data are released later this month. Policymakers also pay close attention to wage growth, as it can help inform expectations for consumer spending — the main engine of the economy. A separate report Wednesday that combines the inflation figures with recent wage data showed real earnings grew 1.4% from a year ago, the same as in September.
Applications for US unemployment benefits fell to the lowest level since May last week, signaling there is still a healthy demand for workers after recent storms and strikes. Initial claims decreased by 4,000 to 217,000 in the week ended Nov. 9. The median forecast in a Bloomberg survey of economists called for 220,000 applications. Jobless applications data have been even more volatile than usual recently as Southeastern states recovered from two hurricanes and Boeing Co. workers ended a weeks-long strike. At the current level, new claims are now below the average of the past two years. The four-week moving average of new applications for unemployment benefits, a metric that helps smooth out volatility, declined to 221,000, according to Labor Department data released Thursday. That’s also the lowest figure since May. Federal Reserve officials cut interest rates last week by a quarter percentage point, partially in an effort to maintain strength in the labor market. Continuing claims, a proxy for the number of people receiving benefits, fell to 1.87 million in the week ended Nov. 2. Before adjusting for seasonal factors, initial claims rose last week. California, New York and New Jersey saw the largest gains. Michigan had a large decline in applications.
US producer prices picked up in October, fueled in part by gains in portfolio management and other categories that feed into the Federal Reserve’s preferred inflation gauge. The producer price index for final demand increased 0.2% from a month earlier after rising a revised 0.1% in September, Bureau of Labor Statistics data showed Thursday. Compared with a year ago, the PPI rose 2.4%. A measure of producer prices excluding volatile food and energy categories climbed 0.3% and 3.1% from a year ago. The wholesale inflation data follow the more closely watched consumer price index, which showed on Wednesday that underlying inflation remained stubborn for a third month. While price pressures have largely abated this year, a lack of headway more recently suggests Fed policymakers will slow the tempo of interest-rate cuts. Economists parse the PPI data for categories that feed into the Fed’s preferred inflation measure — the personal consumption expenditures price index. Portfolio management fees, which track the stock market, climbed 3.6%, the most in six months. Airfares were also higher, increasing by the most since the end of 2022. Health-care categories were mostly stronger, the report showed. The PPI report showed services costs increased 0.3%, after a 0.2% gain in the prior month. Prices of goods, excluding food and energy, were also 0.3% higher in a slight pickup from the prior month. Tempering the overall gain in PPI were declines in wholesale food and energy prices.
US retail sales advanced in October, boosted by a jump in autos purchases, while other categories signaled some momentum entering heading into the holiday season. The value of retail purchases, unadjusted for inflation, increased 0.4% after an upwardly revised 0.8% gain in September, Commerce Department data showed Friday. Excluding autos, sales edged up 0.1%. Eight of the report’s 13 categories posted increases, led by electronics and appliance stores. Auto sales posted the strongest advance in three months. E-commerce rose at a more moderate pace, possibly reflecting discounting during Amazon.com Inc.’s Prime Day as well as similar promotions at Walmart Inc. and Target Corp. October’s data were mixed, but the upward revisions suggest consumers entered the final months of the year on a stronger footing than previously thought, and may portend a solid holiday-shopping season. However, inflation remains stubborn and several retailers are already considering hiking prices in anticipation of higher tariffs on imported goods under President-elect Donald Trump. That may distort the retail sales data going forward — since they’re not adjusted for inflation, an advance could merely reflect higher prices rather than greater sales activity. The data showed so-called control-group sales — which feed into the government’s calculation of goods spending for gross domestic product — decreased 0.1% in October, a notable step-down after rising by the most since the start of 2023. The measure excludes food services, auto dealers, building materials stores and gasoline stations. However, over the past three months, control-group sales increased an annualized 4.6%, suggesting the economy got off to a good start at the end of the year. Combined with firm inflation readings earlier this week, the data will likely keep Federal Reserve officials cautious in their approach to further interest-rate cuts.
US industrial production declined in October as the impacts from a Boeing Co. machinists’ strike and a pair of hurricanes reverberated through manufacturing for a second month. The 0.3% decline in output at factories, mines and utilities followed a revised 0.5% decrease a month earlier, Federal Reserve data showed Friday. Manufacturing output, which accounts for about three-fourths of total industrial production, slid another 0.5%, after a revised 0.3% drop the previous month. Mining and energy extraction rose 0.3%, while output at utilities climbed 0.7%, the most in four months. A 53-day walkout by Boeing workers crippled aircraft production before union members agreed to a new labor contract earlier this month. The company delivered just 14 jetliners in October, the fewest in nearly four years. The result, according to the Fed’s latest industrial production report, was a 5.8% plunge in the output of aerospace equipment last month on top of an 8% decline a month earlier. After suppressing industrial output in September, Hurricanes Milton and Helene continued to weigh on activity last month. Together, these storms reduced October industrial production by 0.1 percentage point. The Fed also said the strike reduced industrial production by a combined 0.5 percentage point in both September and October. The aircraft sector’s downturn exaggerates the more general malaise in US manufacturing as elevated borrowing costs, a pause in some capital spending plans and tepid growth in overseas economies make it difficult for production to gain much traction.
Interest Rate Insight and the Fed
Federal Reserve Bank of Richmond President Thomas Barkin said the economy is in a good place, which has allowed the US central bank to lower borrowing costs. “A strong but choosier consumer, coupled with a more productive and better valued workforce has landed the economy in a good place,” Barkin said Tuesday in remarks prepared for a speech at the Baltimore Together Summit. “The Fed is in position to respond appropriately regardless of how the economy evolves,” he said, with interest rates off their peak but still above their historic lows. Barkin voted with his Federal Open Market Committee colleagues on Nov. 7 to lower the benchmark lending rate by a quarter-point, bringing it into a range of 4.5% to 4.75%, following a half-point cut in September. The committee described risks to its employment and inflation goals as “roughly in balance.” In his speech, the Richmond Fed president said increasingly price-sensitive consumers are helping curb inflation, and the labor market has remained resilient as companies have held on to talent. Productivity is up in part, he said, because companies made investments in automation during the pandemic and also now have a more experienced workforce amid lower turnover. Barkin said he is looking at two scenarios for the economy: As election uncertainty fades, companies could begin investing and hiring again, leaving the Fed to focus on upside inflation risks. Or, companies could respond to margin compression from weaker pricing power by firing workers, which would elevate employment risks for the Fed. Fed Chair Jerome Powell reiterated on Nov. 7 that officials are not in a hurry to reduce borrowing costs, saying at a press conference that the best way to find a neutral rate for the economy is “carefully, patiently.” Financial markets have dialed back expectations for a rate cut in December to about 65%, down sharply from near full certainty at the start of the month.
Federal Reserve Chair Jerome Powell said the recent performance of the US economy has been “remarkably good,” giving central bankers room to lower interest rates at a careful pace. “The economy is not sending any signals that we need to be in a hurry to lower rates,” Powell said Thursday in prepared remarks in Dallas. “The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.” US central bankers began lowering borrowing costs in September with an aggressive half-percentage-point cut, and then lowered the policy rate again by a quarter point last week. They’ve signaled a willingness to cut rates further so long as inflation continues to slow. Powell’s comments appear in line with some of his other colleagues who are advocating a go-slow approach to future rate reductions. Data out earlier this week showed a measure of underlying US inflation remained firm in October. “Inflation is running much closer to our 2% longer-run goal, but it is not there yet,” Powell said. “We are committed to finishing the job. With labor-market conditions in rough balance and inflation expectations well anchored, I expect inflation to continue to come down toward our 2% objective, albeit on a sometimes-bumpy path.” Powell made no comments on the possibility of a cut at the December meeting. Futures markets have priced in about a 70% probability of a quarter-point reduction. Monetary policy could face crosswinds next year if President-elect Donald Trump fulfills his campaign promises to cut taxes, restrain immigration and deploy tariffs. Policy uncertainty may also be contributing to the Fed’s more inertial attitude toward lowering rates right now.
The US economy continues to expand at a robust pace, averaging about 3% growth over the past two years. The labor market, meanwhile, has cooled, but remains resilient. Powell said the labor market is in “solid condition,” and said by many metrics it’s back to “more normal” levels consistent with the maximum employment mandate. “Improving supply conditions have supported this strong performance of the economy,” Powell said. “The labor force has expanded rapidly, and productivity has grown faster over the past five years than its pace in the two decades before the pandemic, increasing the productive capacity of the economy and allowing rapid economic growth without overheating.” Higher productivity, which allows workers to produce more output per hour, helps to keep a lid on inflation and is key to long-term economic growth. Some policymakers, including the Minneapolis Fed’s Neel Kashkari, have said higher productivity may ultimately lead to fewer rate reductions. “Ultimately, the path of the policy rate will depend on how the incoming data and the economic outlook evolve,” Powell said.
Federal Reserve Bank of Chicago Austan Goolsbee said as long as inflation continues down toward the central bank’s 2% goal, interest rates will be “a lot” lower over the next 12-18 months. But Goolsbee agreed with Fed Chair Jerome Powell, noting policymakers are not in a hurry to lower borrowing costs. “As long we keep making progress toward the 2% inflation goal, over the next 12 to 18 months rates will be a lot lower than where they are now,” Goolsbee said on CNBC Friday. The Chicago Fed chief said it makes sense to slow rate cuts at some point amid uncertainty over where the neutral rate is. That’s the level where policy neither stimulates nor restrains the economy. “If there’s disagreement of what’s the neutral rate, it does make sense at some point to start slowing how rapidly we’re getting there,” he said. Goolsbee added that interest rates remain restrictive, so there’s still room to cut borrowing costs to a more neutral level.
Impactful International News
Prime Minister Justin Trudeau’s government directed an independent labor board to end lockouts at Canada’s largest ports, as it did with railways in August, to stop an economic disruption in the country. Labor Minister Steven MacKinnon announced that he has invoked his authority under the Canada Labor Code and forced the matter to the Canada Industrial Relations Board, requesting it to order the sides to go back to work, resume operations and enter into an arbitration process to resolve the dispute. The use of this measure is highly unusual, and could further damage the Liberal government’s relations with labor groups. Dock foremen at British Columbia ports have been locked out for more than a week. Montreal port employers did the same on Sunday after their 1,200 unionized employees rejected a contract offer that included pay increases of about 20% over six years. That would have provided average annual compensation of more than C$200,000 ($143,330) by the end of the contract. “These work stoppages are impacting our supply chain, hundreds of thousands of Canadian jobs, our economy and our reputation,” MacKinnon said at a news conference Tuesday. He justified his decision by saying the negotiations had reached a “total impasse” and there was “no perspective, no possibility realistically” of agreements being reached after more than a year of negotiations. “Canadians have limited tolerance right now for economic self-harm,” he said. More than C$1.2 billion in goods handled every day in those ports have been disrupted, snarling supply chains. We hope for a speedy resolution!
China entered the fourth quarter with a more balanced economy as consumption growth nearly caught up to factory output, in an upswing that now depends on how much more stimulus Beijing may deploy in the event of a tariff shock when Donald Trump returns to the White House in 2025. Retail sales expanded at the fastest in eight months in October, according to figures published by the National Bureau of Statistics on Friday, exceeding the forecasts of all 29 economists surveyed by Bloomberg. Industrial production increased at a slightly slower pace from the previous month but hovered above a level critical to achieving the government’s 2024 growth target of around 5%. The strength in consumption is encouraging after a lopsided recovery in China in which household spending trailed production, held back by sluggish sentiment among shoppers and the private sector. Boosting domestic demand could become even more pressing after last week’s reelection of Trump as US president, given his threat of a 60% tariff on most Chinese imports risks wreaking havoc on the Asian country’s export sector. “There are preliminary signs that policies are intended at rebalancing the economy and its growth model,” said Jacqueline Rong, chief China economist at BNP Paribas SA. “Whether the mild recovery can continue next year depends on what additional policies will be rolled out. We think further policy support is needed to maintain the momentum of growth in 2025.”
Company Events
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