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US INFLATION: Importance Of PCE Puts Focus On Friday's PPI Components (1/2)

US INFLATION
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Pending Friday's PPI report, September's CPI report is actually quite neutral in terms of near-term Fed implications (ie a 25bp November cut) despite the higher-than-expected headline / core / supercore readings.

  • While it means CPI is still uncomfortably high, and effectively keeps the door closed on a 50bp cut, arguably it's slightly dovish in some details, with overall core services inflation decelerating as housing inflation (a recent concern for FOMC members) cooled slightly.
  • The Fed isn't currently ignoring CPI, but it's downplaying it significantly in its decision-making. Fed Gov Waller cited the cool PCE - and not hot CPI - readthrough of the pre-September FOMC blackout data for August as one of the reasons for the "surprise" 50bp cut. Given the high September CPI print, Friday's PPI report now becomes more elevated in importance with subcategories eyed for PCE implications.
  • On those details, a few examples: Airfares printed 3.2% M/M in September CPI - but last month when it printed 3.9%, PCE airfares printed 0.3%. Vehicle insurance was 1.2% in CPI - but it's had very limited correlation with the PCE version (the measurement methodology is quite different), averaging around 1% M/M for months while the PCE version has decelerated.
  • Healthcare services were notably strong in CPI - professional outpatients inflation +0.6% M/M, highest since 2021, with CPI professional + hospital care up 0.5% for the highest unrounded this year - is by far the most worrying component in terms of correlation with upside for core PCE, though the PPI equivalent will carry far more weight (dental and "other" care in CPI were strong but less than 20% of the PCE healthcare services weighting).
  • Food away from home CPI up 0.34% M/M is also an upside development re PCE. But the details will be important, with PPI inputs having a better correlation of late with the PCE readthrough.
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Pending Friday's PPI report, September's CPI report is actually quite neutral in terms of near-term Fed implications (ie a 25bp November cut) despite the higher-than-expected headline / core / supercore readings.

  • While it means CPI is still uncomfortably high, and effectively keeps the door closed on a 50bp cut, arguably it's slightly dovish in some details, with overall core services inflation decelerating as housing inflation (a recent concern for FOMC members) cooled slightly.
  • The Fed isn't currently ignoring CPI, but it's downplaying it significantly in its decision-making. Fed Gov Waller cited the cool PCE - and not hot CPI - readthrough of the pre-September FOMC blackout data for August as one of the reasons for the "surprise" 50bp cut. Given the high September CPI print, Friday's PPI report now becomes more elevated in importance with subcategories eyed for PCE implications.
  • On those details, a few examples: Airfares printed 3.2% M/M in September CPI - but last month when it printed 3.9%, PCE airfares printed 0.3%. Vehicle insurance was 1.2% in CPI - but it's had very limited correlation with the PCE version (the measurement methodology is quite different), averaging around 1% M/M for months while the PCE version has decelerated.
  • Healthcare services were notably strong in CPI - professional outpatients inflation +0.6% M/M, highest since 2021, with CPI professional + hospital care up 0.5% for the highest unrounded this year - is by far the most worrying component in terms of correlation with upside for core PCE, though the PPI equivalent will carry far more weight (dental and "other" care in CPI were strong but less than 20% of the PCE healthcare services weighting).
  • Food away from home CPI up 0.34% M/M is also an upside development re PCE. But the details will be important, with PPI inputs having a better correlation of late with the PCE readthrough.