Core U.S. Consumer Price Index (CPI) inflation rose 0.22% month-over-month in October, broadly in line with expectations for firming price trends but notably stronger than the 0.14% average monthly pace this year. In a year when a confluence of idiosyncratic factors in various industries has weighed on realized inflation, the October print boosted the year-over-year rate to 1.8% and lends support to our forecast for core CPI inflation (which excludes energy and food prices) to accelerate back to 2% in 2018.
Turning to the details of today’s report, firming core inflation reflects what appears to be a hurricane-related jump in used car prices (+0.7%) and a rebound in medical care inflation (+0.3%), after what the Bureau of Labor Statistics (BLS) referred to as “small sample” issues weighed on nonprescription drug prices last month, dragging down the broader category (-0.1%). Shelter pricing trends also held firm.
Under the hood
Growth in new car leases has contributed to an overhang of used car inventory and resulted in persistent monthly price declines, averaging 0.45% over the course of this year. However, an apparent rise in replacement demand for cars damaged during the two recent severe hurricanes appears to have helped strengthen used car prices in October (+0.7%). Industry used car auction data, which tends to lead the CPI, suggests continued firming in used car prices through year-end. However, looking further out, slowing consumer auto sales, consistent with late-cycle behavior, should ultimately limit price increases for autos.
Medical prices are firming
Medical inflation also firmed after generally softer trends for the better part of this year. Medical goods prices, which include prescription and nonprescription drugs, were flat in October after a 0.83% decline in September owing to the largest-ever drop in nonprescription drug prices in the Midwest region. More broadly, pricing trends in medical goods and services have been volatile over the past several years amid a BLS-reported trend decline in sample response rates in this category. Medical services prices (+0.3%), including hospital prices (+0.5%), also strengthened in October.
We’ve found that the quarterly employer cost of employee benefits series within the BLS’ employer costs for employee compensation (ECEC) series tends to lead CPI for medical services, and current trends imply that medical services inflation should be running closer to 3.0% year-over-year, versus the current 1.9% pace. This points to continued firming after broad-based disinflation for much of this year.
Rents tick up
In a continuation of recent trends, owners’ equivalent rent (OER) and rental prices increased 0.31% and 0.27%, respectively. We think the price adjustments arising from absorption of the glut of multifamily housing in large cities that weighed on shelter inflation earlier this year appear to have run their course. Outside of the largest cities, the supply of housing is tighter – and this plus tighter labor markets should continue to support shelter inflation in 2018.
Bottom line? Broad firming in October looks set to continue through year-end, further strengthening our forecast for 2% inflation in 2018.
For more of PIMCO’s views on the complex drivers of inflation in the U.S. and globally, please visit our inflation page.
Tiffany Wilding is a PIMCO economist focusing on the U.S. and is a regular contributor to the PIMCO Blog.