Consumer inflation expected to have run hot in September, boosted by rent

Fueled by rising rental costs, consumer inflation is likely to have remained elevated in September but slightly below the August pace.

The closely watched CPI is due out at 8:30am ET Wednesday and is a critical inflation report ahead of the Federal Reserve’s next rate decision in early November. The Fed is widely expected to deliver another blow to contain inflation with a three-quarter point rate hike on November 2nd.

According to the Dow Jones, economists expect the consumer price index to rise 0.3% in September compared to 0.1% in August. That would mean that inflation fell from 8.3% to an annual pace of 8.1%.

Ex-Food & Energy, CPI is expected to have risen 0.4% from 0.6% in August. However, due to base effects, the 6.5% annual rate of core inflation is expected to be higher than the 6.3% in August.

“Core inflation will be higher, so it’s still inflation that hasn’t peaked in many ways. There are more risks of supply-side shocks,” said Diane Swonk, chief economist at KPMG.

She added that energy costs are expected to fall again but may later rise after OPEC+ announced it would cut crude oil production by 2 million barrels a day. She also expects some impact from Hurricane Ian in the coming months.

Through November and December, prices in some categories could be impacted by the hurricane as Floridians replace cars and repair or rebuild homes devastated by Ian on his trek through the Southeast. That could drive up building material costs, new and used car prices, and the cost of everything from appliances to home furnishings.

Bank of America expects core commodities to rise 0.2% in September compared to August’s 0.5% gain. Services are expected to rise 0.5%, driven by accommodation costs, which make up 40% of the CPI. Bank of America economists expect food prices to rise 0.7%, slightly slower than August’s 0.8% gain. After falling 5% in August, energy costs are expected to fall another 3.5%.

Economists expect service inflation to remain hot in September on rising wages and labor shortages. Prices for rentals and all accommodation, including hotels, are expected to have been higher. Education costs are expected to have risen as schools and daycares have reopened, and the cost of medical services has also risen. Airfares and car insurance should also rise, but used car prices are likely to fall for the most part.

“Every month that core commodities don’t come down is a sign that demand is outstripping supply,” said Michael Gapen, chief US economist at Bank of America. “That means the Fed will have to restrain demand more than it might like.”

Goldman Sachs economists expect rental inflation to remain elevated in September, coming in at 0.7%m/m. This level corresponds to the three-month trend.

While the trend in accommodation costs in CPI has been upwards, it is lagging behind the actual rental market. Goldman economists see the potential for housing inflation to slow.

“Askable rents for new leases have slowed sharply and the rise in multi-family construction combined with a notable weakening in rental demand points to a further slowdown,” the economists wrote. “We expect housing inflation to slow to a monthly pace of 0.4-0.5% by year-end, peaking at around 7% yoy early next year.”

Intense focus on inflation

The market is heavily focused on the CPI as it is considered an important input to the Fed. Last week’s solid jobs report in September gave investors little hope that the Fed might slow its rate hikes.

“I don’t think the employment report gave them much leverage to change their mindset,” Gapen said.

The Fed has raised the Fed Funds interest rate range to 3% to 3.25% since March, when it was zero to 0.25%. Economists expect the Fed could hike rates by at least another full percentage point by the end of the year.

“When the CPI is strong, the markets will sell off. Stocks aren’t going to like that,” Gapen said. “If it comes a little lower they will say the job market is still strong they will go up 75 [basis points]Unless the report shows a big miss on the downside, markets will expect a three-quarter-point rate hike, he said.

“Inflation has proven difficult to forecast and given the negative CPI ‘shock’ in August (13 September) it would be difficult for any investor to publish this report with confidence,” wrote Fundstrat founder Tom Lee.

Lee noted that hotter-than-expected inflation reports in December, January and August led to large falls in stock markets when they were released. However, better reports in February, June and July had the opposite effect.