MNI INTERVIEW: Cooldown in Oct CPI Overstated -Fed's Meyer

An unexpectedly softer U.S. CPI report for October paints a rosier picture of moderating inflation than is likely the case, Atlanta Fed economist Brent Meyer told MNI.

Roughly 60% of the CPI basket is still rising at rates above 5%, and alternative measures of underlying inflation remain "very elevated, reflecting broad-based price pressure," he said.

The Median, 16% Trimmed-Mean and Sticky CPI measures all posted increases in the 5% to 7% range, well above core CPI reading of 0.3% for the month or 3.3% on an annualized basis.

“This is a better report than we’ve seen over the past several months, but only slightly. The topline numbers are overstating the improvement in underlying inflation,” Meyer said.

CORE SERVICES

Economists have been waiting some time to see the consumer rotation from goods spending back to services show up in prices, and "we’re finally starting to see that play out," Meyer said, calling the trend the best part of the report. Core goods prices fell 0.4% in the month, the first decline since March.

But core CPI and especially core services inflation were pulled down by a very sharp decline in health insurance prices due to the Labor Department's backward-looking methodology, he said. That technical factor will continue to be a drag on CPI in the coming months but won't affect the Fed's preferred PCE inflation measure, which estimates health care prices using different source data.

Meanwhile, a tight labor market and fast wage growth will likely prevent pressure on core services prices from evaporating very quickly, he said.

Richmond Fed President Thomas Barkin told MNI this week interest rates may peak higher than the Fed has anticipated until now if inflation doesn't slow and the labor market remains tight. (See MNI INTERVIEW: Fed's Barkin-Prices May Force Higher Rates Peak)