Updates with post on U.S. economic data

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EMBARRASSMENT OF DATA RICHES: CPI, UMICH, FLASH PMI

After more than three weeks of government shutdown, with scant official data to chew on, investors on Friday were served a heaping plate of indicators.

The Labor Department's Consumer Price Index (CPI) USCPI=ECI, which tracks the prices U.S. consumers pay for a basket of goods and services, was a tad cooler in September than analysts expected nearly across the board.

As expected, prices rose 0.3% on a monthly basis, versus 0.4% in August. Year-over-year, the headline figure landed at 3.0%, just shy of the 3.1% consensus but marking a 0.1 percentage point increase from the previous month.

Core CPI, which strips out volatile food and energy prices and is often referred to as "underlying inflation," printed at 0.2% and 3.0% on monthly and annual bases, respectively. Both landed 0.1 ppt south of consensus and marked a nominal cool-down from the prior month's figures.

So, while core was a tad cooler than economists predicted, it shows price growth continues to hover well north of Powell & Co's 2% annual inflation target.

The question remains centered on the extent to which President Donald Trump's tariffs are affecting the prices Americans are paying.

"Tariffs are still pushing up goods prices and the passthrough is broadening," writes Michael Pearce, deputy chief U.S. economist at Oxford Economics. "We estimate tariffs have added 0.4 ppts to headline inflation. Assuming tariffs do not rise much further from here, that one-off boost to goods prices from tariffs and the weaker dollar will begin to fade next year."

Line-by-line, a 1.5% increase in energy prices, largely attributed to crude supply concerns arising from strife in the Middle East, helped drive gasoline 4.1% higher, while airfares jumped 2.7%. Apparel and transportation price growth were hotter than the baseline, at 0.7% and 0.8%, respectively.

The cost of shelter and services, two metrics closely watched by the Fed, both rose by 0.2%. But year-on-year, shelter and services prices are both up 3.6%, well above the underlying measures.

But none of this will have much effect on near-term Fed policy, according to Peter Cardillo, chief market economist at Spartan Capital Securities in New York.

"We're looking at a 25 basis-point cut next week and they will have enough time from now to December to evaluate the inflation data coming in even if it's delayed,” Cardillo told Reuters. “But it's quite clear that the Fed has indicated that for now they've abandoned the inflation fight to prop up the jobs market from deteriorating any further, which means further rate cuts ahead."

Separately, the University of Michigan's (UMich) second and final take on October consumer sentiment USUMSF=ECI was unexpectedly downgraded, giving up 1.4 points to land at 53.6.

It's the lowest final UMich reading since May, which boasted the bleakest UMich reading in nearly three years.

Survey participants' assessment of present conditions deteriorated by 3.9% from UMich's initial take and 3.0% from last month, while near-term expectations were revised 1.8% lower, landing 2.7% below the September print.

"Overall, consumers perceive few material changes in economic circumstances from last month; inflation and high prices remain at the forefront of consumers’ minds," says Joanne Hsu, UMich's director of consumer surveys.

"Consumers continue to express frustration over the persistence of high prices, with 44% spontaneously mentioning that high prices are eroding their personal finances, the highest reading in a year."

The graphic below shows the consumer outlook continues to wallow well below the post-COVID plunge.

Speaking of high prices, the closely scrutinized inflation expectations element was downwardly revised from UMich's preliminary initial October reading.

Respondents now expect annual price growth of 4.6% a year from now, 1.6 percentage points hotter than today's core CPI reading.

Longer-term, consumers expect annual inflation of 3.9% five years from now, 20 basis points higher than last month.

While consumer inflation expectations are not accurate predictors of hard inflation numbers, the data shows that concerns about the inflationary effects of tariffs are still very much on consumers' minds.

Finally, activity at U.S. businesses has gained some steam this month.

S&P Global's advance "Flash" October purchasing managers' indexes (PMI) showed the manufacturing side USMPMP=ECI edging 0.2 point higher to 52.2 instead of standing pat at 52.0 as economists predicted. The services sector USMPSP=ECI also accelerated, jumping a full point to 55.2 in defiance of the 0.7 pt decline analysts expected.

Taken together, the composite measure USPMCF=ECI added 0.9 pt to 54.8. Even so, that's still comfortably above 50, the PMI dividing line between contraction and expansion.

After calling the data "robust," and saying that the report indicates the July-September period is "the best quarter so far this year for US businesses," Chris Williamson, S&P Global's chief business economist adds that growth has "slowed from its recent peak back in July, and September saw companies also pull back on their hiring."

Calling the report evidence of "sustained strong economic growth at the start of the fourth quarter," Williamson concedes there are "some reports of businesses being adversely impacted by the government shutdown."

“However, business confidence in the outlook for the coming year has deteriorated further and is at one of the lowest levels seen over the past three years as companies worry about the impact of policies, most notably tariffs," Williamson adds.

(Stephen Culp)

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